The rate at which foreign investments by multinational corporations are carried out has often culminated to the challenge of currency risk which can otherwise be defined as that existing probability of loss resulting from the alterations in the exchange rates between 2 currencies. The following article will, therefore, present a discussion on the necessary steps that can be undertaken by the multi-national enterprises in mitigating the currency risks.
Just as the financial markets of operation have the propensity of making the exchange rates to rise, they also provide a solution for them. Here, investing in the exchange traded funds or the mutual funds would assist in preventing the currency risks. These investments use sophisticated instruments such as options, as well as, futures for the reduction of losses. (Pfeil 205)
Global diversification
If the multinational corporations have several investments in different foreign securities, they should ensure that they possess investments in multiple regions as opposed to just one single place. Investing in the regions where the currency has been pegged to the dollar is also a viable alternative because the dollar is regarded as the world’s safest currency. ("How Do Companies Mitigate The Risk Of Foreign Currency?")
Setting a requirement for prompt payment
Even though the exchange rates regularly float within a day, they in most cases do not fluctuate from day to day. Also, on an annual basis, currencies do not enormously fluctuate. The multinational companies can as a result set its contracts to possess shorter repayment terms. Essentially, this will limit the period that they are exposed to the risks and as such receive their money before enormous changes in the exchange rates.
Investing in the nations with rising, as well as, strong currencies.
The multinational companies should basically look the countries for sound economies and stick with them. (Gustke)
Works Cited
Gustke, Constance. "4 Ways To Minimize Foreign Currency Risk | Bankrate.Com". Bankrate.com. N.P., 2016. Web. 16 June 2016.
"How Do Companies Mitigate The Risk Of Foreign Currency?” Smallbusiness.chron.com. N.P., 2016. Web. 16 June 2016.
Pfeil, Graf. Effective Control of Currency Risks: A Practical, Comprehensive Guide. United States: Palgrave Macmillan, 1988.
