The Importance Of Exchange Rate Risk Management

The second selection is exchange rate determination and behavior/exchange rate risk management. Exchange rates of one country will be different from another country due to supply and demand. These are rates are changing everyday and are found on financial markets by banks. The exchange rate of a country is important for the country’s health and trade. Many factors can alter a country’s exchange rate, such as inflation, interest rates, account deficits, economic performance and political reasons. An investor needs to protect itself from exchange rate risk by diversifying, hedging and other ways to prevent large losses in fluctuations of currency.
Yuan’s Appeal Wanes as It Joins IMF’s Reserve-Currencies Club, Hunter & Vaishampayan, Sept. 30,
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The WSJ predicted China’s reserves would drop by $11 billion, but it dropped by $19 billion. Capital outflows have increased in China with government efforts to stop the outflows. If the U.S. increases interest rates, China’s outflows will increase to increased levels. China will try to strengthen the currency, but the currency is traded within 2% of what the central bank sets. From the month prior in September, the yen and euro increased against the dollar. The yuan needs to stop weakening because the loss in reserves is unsustainable.
Pound Drops to Three-Decade Low Against Dollar on Brexit Concerns, Mike Bird, Oct. 5, 2016.
The pound will continue to fall since Britain decided to leave the European Union. The pound fell to a 31-year low against the dollar, which is an alarming sign. Investors have the right to worry because the exit can hurt the investment in the country and the financial sector. Though the pound is dropping against the dollar, investors are leaning towards companies that export goods on the stock market. Since the pound is weaker, companies can increase profits from exporting. However, analysts believe if investment continues to fall within the country the gains on the stock market will be minimal. Also, the weaker pound has made importing materials increasingly
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13, 2016.
Due to the IMF $12 billion loan deal, Egyptian stocks rallied in hopes of saving the economy. The Egyptian pound is trading at record lows on the black market. Due to the uprising in 2011, the economy has struggled and investors have been hesitate. Also, foreign reserves diminished because tourism and foreign direct investment decreased. With the extra funds received from the IMF, the central bank will be able to let the currency trade near market value. On the positive side, sustaining the currency at market value seems is imminent and a weaker currency will increase

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