Reference no: EM133154374

We have found that a major financial risk in international business is the risk of a changing currency exchange rate. There are two basic types of currency exchange risk. One is short term Transactional currency exchange risk and the second is long term Economic, or Operational, currency exchange risk.

The Transactional risk appears when a firm enters into a transaction where a good or service is contracted and the payment is to be made in the future. An example would be buying wine from France for a cost of 100,000 euros to be delivered in three months with payment due upon receipt. If the exchange rate at the time of making the contract is $1.15 /euro the expected cost in dollars is $115,000. But, if in three months the exchange rate is $1.25/euro the realized cost will be $125,000. What can a company do to mitigate this Transaction risk?

The Economic risk/Operational risk comes from a long-term change in exchange rates that changes the economic feasibility of a business operation and the operation must be changed. My video on Foreign Direct Investments and Borrowing refer to the Japanese example, which you can use in your paper. Please include "Immunizing" Financial Statements, i.e., Income Statement and Balance Sheet as shown in my Week 8 video.

Assignment: Briefly discuss that the Bretton Woods Agreement's goal was to foster countries being economically interdependent with each other and a step toward that goal was creating a global fixed exchange rate which eliminated the exchange rate risk from international trade. Then in the 1970s the global fixed exchange rate ended and currencies floated against each other. Discuss briefly what can cause a change in exchange rates in the short term, but focus more on how a company can protect itself from Transaction risk. Then discuss briefly what can cause a long-term change in exchange rates, but focus on how a company can protect itself against that risk.