Importer Companie's Foreign Exchange Risk Exposure

Fabian Fuchs^*
*Correspondence: Fabian Fuchs, Department of Finance and Banking, University of Passau, Innstrabe 27, D-94032 Passau, Germany, Email:

Introduction

One of the most challenging and important issues affecting the economies of many nations are the instability of foreign exchange rates. Some individuals or groups have loans that must be paid off in foreign currency while they make sales in domestic currency. Circumstance is most likely more regrettable for the gatherings or individuals who have outside exchanges - exporters and merchants. If the home currency appreciates, exporter groups run the risk of losing some of their earnings, while importer groups run the risk of losing money if the home currency depreciates. Due to the possibility of excessive fluctuations on the foreign exchange (Forex, FX) market, everyday purchasing options for uploading products pose a forex fee risk. The financial planning process for groups becomes more difficult and the monetary outcomes are uncertain as a result of exchange rate risk [1].

Description

The primary objective of this paper is to showcase the hedging method using FX forwards to mitigate the foreign exchange risk exposure faced by importer companies, particularly in relation to product costs incurred in foreign currencies. The analysis and strategies presented in the paper are demonstrated using the example of a global online retail store that sells products in USD but sources its products from various countries worldwide, thus exposing itself to FX risk. Specifically, the paper focuses on the company's procurement of products from European countries, highlighting the challenge of hedging the USD/EUR exchange rate risk. The paper acknowledges that importers of foreign goods are actively involved in the forex market, which exposes them to currency rate fluctuations [2].

The findings of this paper have relevance for both importer companies globally and any organization exposed to FX risk. While the hedging strategy illustrated in this paper is specifically applied to the USD/EUR exchange rate risk, the developed methods and applications can be easily replicated for any FX currency pairs. The subsequent section provides a literature review that delves into relevant material pertaining to the strategies employed in the paper, aiming to narrow down the scope for a comprehensive understanding of the theories and applications utilized. Furthermore, the paper utilizes historical price data, employing descriptive statistics such as diagrams and histograms. Additionally, the distribution fitting technique known as Pearson's Chi-squared (X2) Test is employed to make inferences about the probability distribution of the historical data. Such statistical analysis is crucial for generating plausible future prices for a specific company [3].

The foreign exchange risk hedging strategy section introduces the theoretical foundations of hedging techniques for minimizing FX risk exposure. It briefly outlines three major approaches for managing FX risk exposure maintaining stable profit margins, natural hedging and hedging using forward contracts. The latter approach involves the use of derivative instruments known as forward contracts. Essentially, forward contracts are financial instruments that enable companies and individuals to set today the terms of future transactions, thereby guaranteeing a predetermined exchange rate for future transactions. The final section addresses the main research question of the paper - whether hedging with FX forwards or allowing FX exposure to fluctuate is more beneficial - by calculating average daily costs with and without hedging. In conclusion, the key results are emphasized once again, highlighting the preferred approach of floating exposure with an expected reduction in daily costs of $67 USD. Besides distribution becoming strategies. Further research reviewed for this paper speak derivatives markets and hedging techniques the usage of forwards and futures contracts [4,5].

Conclusion

Finally, this paper consists of literature from unique discussions of overseas forex derivatives, valuation and hedging with and without derivatives relating approximately the usage of overseas forex derivatives, Brown approximately coping with FX hazard with derivatives and campbell, Medeiros and viceira approximately international forex hedging. References given above define all fundamental developments with inside the studies of FX hazard publicity problems, its hedging and statistical historical past vital to put in force hedging techniques primarily based totally on real-lifestyles enterprise cases. Further research ought to be focusing greater on mixture of theoretical backgrounds and mathematical fashions for clearer view of the usage of hedging techniques in practice.

References

1. Aizenman, Joshua and Daniel Riera-Crichton. "Real exchange rate and international reserves in an era of growing financial and trade integration." Rev Econ Stat 90 (2008): 812-815.

Google Scholar, Crossref, Indexed at

2. Cavallino, Paolo. "Capital flows and foreign exchange intervention." Am Econ J Macroecon 11 (2019): 127-70.

Google Scholar, Crossref, Indexed at

3. Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans. "Nominal rigidities and the dynamic effects of a shock to monetary policy." J Polit Econ 113 (2005): 1-45.

 Google Scholar, Crossref, Indexed at

4. Fanelli, Sebastián and Ludwig Straub. “A theory of foreign exchange interventions.” National Bureau of Economic Research, 2020.

 Google Scholar, Crossref, Indexed at

5. Ferrero, Andrea and Martin Seneca. "Notes on the Underground: Monetary Policy in Resource‐Rich Economies." J Money Credit Bank 51 (2019): 953-976.

Google Scholar, Crossref, Indexed at