Academic Review: Foreign Exchange Risk, Influences, and Hedging

This document provides a concise review of academic literature concerning foreign exchange risk and hedging strategies employed by companies. It defines foreign exchange risk as the potential loss arising from fluctuations in exchange rates, impacting organizations through investment devaluation and increased costs for foreign transactions. The review highlights the importance of hedging strategies, such as forward contracts, currency swaps, and options, in mitigating these risks and protecting profit margins. The literature emphasizes that a failure to implement effective hedging strategies can significantly affect a company's profitability when operating in multiple currencies.

Finance

Academic Literature Sources which support and enable the achievement of the aims
The foreign exchange risk is referred to as the potential loss that is being occurred due to the
exposure to the rate of foreign exchange fluctuations. The foreign exchange risk depicts that
an investment or assets dominated in the foreign currency would lose value due to the
unfavourable exchange fluctuations rate between the foreign currency and domestic currency
of the investment holder. Foreign exchange risk influences the organizations as they lose the
value of their investment due to the changes in the rate of exchange (Korkeamaki and Xu,
2010). The organizations purchasing products and services from the foreign supplier have to
face foreign exchange. If the payments are due then the company may have to pay higher
amounts in the future due to the fluctuations in the foreign exchange. The depreciation and
appreciation of the currency value impose a significant impact on the import and export of
the products and services.
The hedging strategies are referred to the procedures and rules followed by the organizations
and investors for protecting their profit margin from the volatility of foreign exchange. The
most common hedging currency risk method is through the utilization of hedging products
such as forward contracts, currency swaps, and options (De Angelis and Ravid, 2016). The
products balance the chance of rate fluctuation rate of exchange in different ways that assist
the companies to protect their investment from losing its value. If an organization is working
in multiple currencies then lack of implementation of hedging strategy can affect the profit
margins.
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References
De Angelis, D. and Ravid, S. (2016). Input Hedging, Output Hedging, and Market
Power. Journal of Economics & Management Strategy, 26(1), pp.123-151.
Korkeamaki, T. and Xu, D. (2011). Institutional Investors and Foreign Exchange Risk. SSRN
Electronic Journal, 5(3).
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