Foreign exchange risk implies the risk on the value of an investment due to deviations in foreign exchange rates. Additionally, foreign exchange risk arises from exposure to unprecedented changes within exchange rates amid two currencies. Foreign exchange risk poses specific problems on organizations. Foremost, exchange risk affects the businesses that conduct exportation or importation in the global economy. Usually, multinational corporations face this risk based on the importation or exportation of commodities and services globally. This is because of the difference in currency exchange rates between countries. Typically, the value of the exported or imported goods undergoes conversion to suit the recipient’s currency. However, conversion from the original currency may lead to a decrease in the commodity’s value. This is because of the changes in the recipient’s currency. Secondly, organizations investing internationally in foreign countries may face a decrease in their investment’s value. Foreign exchange risks may decrease an international investment’s value. This will force the organization to increase its cash outflow in order to mitigate the risk. An increase in cash outflow will only strain the requirements of the working capital. For instance, an investment made in a country with a devalued currency may lose its value. However, it is possible to protect organizations from facing foreign exchange risks. An organization requiring Euros in 6 months may shield itself through hedging. Hedging involves the purchase or selling of a derivative in order to cover liabilities within a foreign currency. One way of hedging involves the use of Forward-Exchange contracts. Forward-exchange contracts offset the profits or losses related to overseas payables and receivables (Bekaert & Hodrick, 156). Therefore, an organization may purchase a forward-exchange contract and pay a minimum deposit of 10 percent. This way, the firm will be able to lock the current exchange rates in order to protect it against future currency fluctuations.
Globalization involves the process of interface and combination among individuals, organizations and governments within various countries. It involves the exchange of commodities and services, cultural features and knowledge internationally. The combination of foreign trade, information technology and investment drives this process globally. For instance, factors such as economic integration influence nations to lower trade barriers. This allows them to avail their economies thus easing trade and investment globally. For the last 10 years, globalization has become an important factor. This is due to the fast rate at which global integration is developing. Over the last decade, the process of global integration has evolved exponentially. This is because of the innovations in drivers such as technology, communication, business and transportation. Such advancements in these factors allow globalization to take place at a dynamic rate. Aspects such as technology have allowed countries to surpass physical boundaries through elements such as the Internet. Thus, it is evident that globalization will change financial management in the future. This is because globalization will influence the increased accessibility of further global markets for trade and investment. This will lead to better and significant international competition. Furthermore, globalization will necessitate innovations in options dealing with corporate finance (Bekaert & Hodrick, 277). Such innovations will involve increases in the accessibility of more corporate finance alternatives. Additionally, globalization will influence the integration of policies and laws guarding financial dealings. Countries possess disparate policies and laws concerning the conduction of business. However, the drive towards a single global economy may create similar guidelines for performing businesses.
Bekaert, Geert, and Robert J. Hodrick. International Financial Management. Boston: Pearson, 2012. Print.