Moreover, the firm can mitigate the short-term foreign currency risks through a variety of hedging instruments, such as, forward contracts, options currency and cross-hedging. Forward exchange contract is the most direct technique of eliminating transaction exposure through hedging. Tyson Foods can do this by selling Euros equivalent of its receivables to the bank for a specified period of time, which can be converted over the period at a forward rate. Therefore, Tyson Foods would be assured of converting the receivables into U.S. dollars no matter what happens to the exchange rate over that period.
Conversely, currency options would give the firm the right to buy and sell a certain amount of currency at a specified exchange rate within a specified …show more content…
If Tyson Foods supposes the price of the Euro to depreciate against the dollar, to avoid the risk of the decline, the firm can identify a European company that wants to make the same sized investment to arrange for an offsetting loan. The two companies will lend each other their respective currencies with which to make their investments thus repay each other later in which case no company is affected by the currency fluctuations. Currency swaps are agreements between two firms to exchange an amount of currency at the moment but to reverse it in future. However, a default on a currency swap does not translates into a loss in investment although a risk may arise since the company must exchange the foreign currency at the new foreign exchange rate in the foreign exchange …show more content…
Moreover, the system would work to provide financial infrastructure to Tyson Foods to allocate funds to its productive investment ways as well as enable it transfer funds. The financial instruments between the firm and other players in the financial market would determine the prices of the assets traded by Tyson Foods. Financial markets’ liquidity function would also provide Tyson Foods with the opportunity to trade financial instruments to raise funds for the firm’s operations. The financial markets would also allow the transfer of short-term funds from agents, such as, Tyson Foods to market participants without funds for short-term
Conversely, currency options would give the firm the right to buy and sell a certain amount of currency at a specified exchange rate within a specified …show more content…
If Tyson Foods supposes the price of the Euro to depreciate against the dollar, to avoid the risk of the decline, the firm can identify a European company that wants to make the same sized investment to arrange for an offsetting loan. The two companies will lend each other their respective currencies with which to make their investments thus repay each other later in which case no company is affected by the currency fluctuations. Currency swaps are agreements between two firms to exchange an amount of currency at the moment but to reverse it in future. However, a default on a currency swap does not translates into a loss in investment although a risk may arise since the company must exchange the foreign currency at the new foreign exchange rate in the foreign exchange …show more content…
Moreover, the system would work to provide financial infrastructure to Tyson Foods to allocate funds to its productive investment ways as well as enable it transfer funds. The financial instruments between the firm and other players in the financial market would determine the prices of the assets traded by Tyson Foods. Financial markets’ liquidity function would also provide Tyson Foods with the opportunity to trade financial instruments to raise funds for the firm’s operations. The financial markets would also allow the transfer of short-term funds from agents, such as, Tyson Foods to market participants without funds for short-term