Question

Firm A is a US firm that operates in France, Italy, Belgium, Netherlands, Austria and Spain. Firm B is also a US firm that operates in India, China, Brazil, Mexico, Germany, and Australia. Assume that both firms are in the same industry and that their financial characteristics (size, leverage, profitability etc.) are not significantly different. Which of the two companies do you believe will be more likely to experience a more significant operating exposure to currency risk?

Answer 1

France, Italy, Belgium, Netherlands, Austria and Spain are part of European Union and Euro is acceptable currency . So the US firm can either try to enter in the agreement using $ or it can also use Euro. Since its all foreign operations will be in Euro , it can hedge its risk by using netting stratergy i.e by hedging only excess receipts (or expenditures) from all countries.

ON teh other hand for firm B the area of operation is asian countries with each having its own currency. SO the firm can either try to negotiate the agreement in $ and transfer the risk, or it has to use derivatives like forward, future or option contracts to hedge its risk.