Foreign Exchange Risk | International Finance

RUNNING HEAD: INTERNATIONAL FINANCE
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International Finance

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Introduction
Foreign exchange risk is a risk that arises when a financial transaction is carried on other
currencies rather than domestic currency. The exchange risk exists when there are chances of
currency appreciation or currency depreciation. There are many types of foreign exchange risks
that are an economic risk, contingent risk, transaction risk and translation risk (Chan et.al,2019).
In order to understand the concept of risk a multinational company is chosen that operates in
UAE and imports goods from France. Emirates group is one of the leading players in the aviation
industry in UAE the company operates all across the world but headquarters in UAE. This
report includes detail about products that the company imports from other countries and risks
that exist in the importing of goods and raw material from the foreign market. Further, different
ways through which the risk can mitigate is explained and one or two ways of managing risk for
Emirates are identified.
Company
Emirates has been in the aviation industry for the last thirty-five years. The company started its
operations from Dubai in 1985. Emirates leased two aircraft which were Airbus 300 B4 and
Boeing 737. Emirates showed tremendous growth in the aviation industry in terms of
competition and scale. According to Skytrax Emirates airlines is one of the largest airlines as it
covers 161 destinations across 6 continents. Emirates market performance is growing up as the
company showed a net profit of US$ 62 million from sales of US$ 13.3 billion (Emirates, 2019)
Emirates positioned itself as one of the luxury services provider company that offer unique
cabins to business class people and provide high-quality luxury services to its target market.
Further, in order to improve its services and provide high-quality experience the company import

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high-class aircraft with high technology in order to reduce its fuel cost and fleet time to satisfy
customer wants. Emirates at present ordered 50 Airbus from its French manufactures, this shows
that the company import aircraft from France, in this the company has to pay in Euro instead of
AED. Due to that Emirates might face risk related to currency fluctuation means any change in
the exchange rate that is if Euro appreciated or depreciated the company total amount varies
accordingly.
Imported Products
 Airframes And Modification
 Components
 Engines
 A350 aircrafts
 Line Maintenance
Foreign Exchange Risk
Foreign exchange risk refers to the loss that the companies face on the international financial
transaction because of currency fluctuations. Foreign exchange risks exist when companies
engage in financial transactions with other currencies transactions. This can affect the investors,
traders and businesses that are engaged in the exports and imports of services and products in
multiple countries. The foreign exchange risks that are associated with international transactions
are transaction risk, translation risk and economic risk (Fablings and Grimes,2015).

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Foreign exchange risk can be mitigated by hedging as the hedging is the technique that is used
by the companies in order to manage the risk that the company is going to face because of
currency fluctuation.
Types of exchange risk
Transaction risk: When any business transactions happen in the other currency rather than the
home currency or domestic currency of the organization. When the organization thinks that there
might be a change in the rate of the currency, when the company enters into a contract till
settling it, this leads to transaction risk.
Translation risk: Translation risk arise when the company has subsidiaries in different countries
and has different reporting currency then the parent company then translation risk arises as the
company needs to change the amount of financial statement and profits of its subsidiary as per
the currency of parent company (Chan et.al,2019).
Economic risk: It is the risk that is related to the change in the market forecast of the company’s
cash flow in the future because of changes in the current exchange rate. For instance, if the
company has a monopoly in the market and near future can face competition and suddenly if the
import rate of raw material becomes cheaper it is termed as a forecast or economic risk.