Risk Management Case Study Sample

Foreign exchange risk is a financial risk that comes about when a commercial transaction has domination in a currency than that of the base currency of the company. There may be adverse moments in the rate of exchange of the dominating currency in regard to the base cash before the date when the operation ended. The Kreploc Company has portrayed a tendency of change in value with 30 percent over the last three months. Warm wear Inc. should not negotiate a contract with set prices and delivery dates in front of the volatile foreign exchange market. There is a constant fluctuation of the exchange rates between the local currency and the foreign currency. The company is likely to experience the risk associated with the variation in exchange rate. Kreploc Company gives a grace period of 90 days which is a long time. Within the period, there may be variation in the exchange rate and thus exposing the company to foreign exchange risks.
However, warm wear Inc. company can mitigate the risks in many ways. It can request to make payment promptly. Despite the fluctuations in currency exchange rates, they don’t change on daily basis. There is less fluctuation of currencies. Warm Wear Company can set the contract and have shorter payment terms. It will enable it evades the exposure to the risk. Secondly, warm wear company can increase the charges for the kreploc.it can study the currency of the country and approximate the amount of risk that they may get. Warm Wear Company can then increase its costs by an equivalent amount. Finally, the friendly company can use hedge. Those markets that influence the rise in foreign exchange rate provide a solution to the problem. Warm Wear Company can, therefore, purchase a spot contract that fixes exchange rates against variations. The company may not get positive benefits bur will not experience negative smacks.
I don’t like Harry Byrite idea. His idea of borrowing money from the bank and making a purchase of a six-month supply of foreign exchange may not work. The period between applying the money and receiving it may be lengthy. As a result, fluctuations in exchange rates may find it prematurely and thus affecting it. In addition, putting the purchased supply of foreign exchange in a safety box until its usage is not profitable. Fluctuations can happen anytime without warning and thus any not shield them from the loss. I propose that we use an alternative method of considering hedging products such as forward contracts. A forward contract will provide an agreed fixed rate that ought payment on a future date. It will, therefore, offer protection from exchange rate fluctuations.
The approach depends on the products and services in addition to their profitability. However, some of the products are more suitable than others. The proportion of the market exposure that one hedge differs and ranges from o to 100 percent. Overseas Sprocket Company is an importer of many products from Europe, and thus the approach will favor it since it has higher market exposure. The market exposure is a representation of the amount a company can lose from the risk of a given investment. The higher market exposure, the greater the risks. It would, therefore, be wise for the company to use the approach since it has higher chances of risks.
The managers of ABD Company ought to know the importance of hedging its exchange rates.it will offer protection to the company against variations in the exchange rates. The duration of the contract is lengthy, one year. The exchange rate is subject to fluctuations and within that period, it can fluctuate as many times as possible. The company could not have let the payment to happen it the local currency. Of instance, the local currency has deteriorated by 20% to the Canadian dollar within a year. It implies that if the company were to receive payment today, it could receive 80 percent of $768000. It means that the company would receive $6144000 which is a reduction from $ 768000. That is a significant drop accrued within a span of one year, and thus the same may also happen in the next year. Due to lack of hedging, the company will have to bear the loss if the worst happen.
Imposition of restrictive rules by ADB Company regarding the money that a country can send overseas will have several adverse effects on the company. ADB intentions of extending its operation will be full of problems. The weakening currency will lead to a reduction in returns. In addition, it will even make worse the returns in an investment portfolio. The ABDA contract may end up providing negative returns and thus making it even more difficult to expand to the neighboring country. The investment can generate substantial profits in addition to the provision of portfolio diversification but, unfortunately, there are many risks attached. Exchange rates have a huge influence on portfolio returns, and thus the company may experience a lot of problems in extending its operations of the neighboring country.