International Finance and Law: Currency Strategy Analysis Case Study

This case study delves into the complexities of international finance, focusing on currency strategy and risk management within the context of a textile exporter. It examines the challenges posed by fluctuating exchange rates in international transactions, where payments are often made in foreign currencies. The study analyzes various financial instruments, such as currency forward contracts, option contracts, and currency arbitrage, to mitigate exchange rate fluctuation risks. The author recommends the use of option contracts for the case study company, Latest Fashion Pvt. Ltd, which will receive payments from buyers and make payments for imported machinery. The study emphasizes the benefits of option contracts over forward contracts and currency arbitrage, highlighting their flexibility and suitability for hedging against currency risks. The case study references academic papers to support its analysis.

Running head: INTERNATIONAL FINANCE AND LAW
International Finance and Law
Name of the Student:
Name of the University:
Author’s Note:

1INTERNATIONAL FINANCE AND LAW
Table of Contents
Currency Strategy:...........................................................................................................................2
References and bibliography:..........................................................................................................2

2INTERNATIONAL FINANCE AND LAW
Currency Strategy:
In most of the cases international transactions are transacted in terms of foreign
currencies. Transactions are recorded in the books of accounts at the current exchange rate of the
involved foreign currency. Actual realisation from the accounts receivables or the actual
payment of the obligation in terms of home currency may be different from the recorded amount
based on the prevailing exchange rate at the time of actual payment or receipt of the amount.
Therefore, each and every international transaction is subject to exchange rate fluctuation risks
(Álvarez-Díez, Alfaro-Cid and Fernández-Blanco2016).
To mitigate such an exchange rate fluctuation risk, various financial market instruments
can be used such as Currency forward contract, option contracts and triangular arbitrage. In the
given case study the Latest Fashion Pvt. Ltd will receive the payment from the buyers at a later
date and they also will make the payment for the machinery imported from Germany at a future
date. Based on the features of option and forward contracts, it would be better for the company to
go for the Option contract, which will give the company to execute the contract at the future date
only if it is favourable to the company. Forward contract will create an obligation to execute the
contract irrespective of loss in executing the contract; on the other hand, option contract will give
the choice to the company to execute or not to execute the contract according to the situation in
the specified future date. Currency arbitrage is a speculation strategy rather than a hedging
strategy. It will not be a good option for the company, as it becomes profitable only when there is
a disparity in exchange rate quotations.

3INTERNATIONAL FINANCE AND LAW
References and bibliography:
Álvarez-Díez, S., Alfaro-Cid, E. and Fernández-Blanco, M.O., 2016. Hedging foreign exchange
rate risk: Multi-currency diversification. European journal of management and business
economics, 25(1), pp.2-7.
Wang, X., Li, F., Liang, L., Huang, Z. and Ashley, A., 2015. Pre-purchasing with option contract
and coordination in a relief supply chain. International Journal of Production Economics, 167,
pp.170-176.