Executive Summary
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How currency risks are created and managed and the types of risk inherent in international trading.
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The techniques for managing currency risks.
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A framework for selecting appropriate techniques in specific business situations.
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An outline and illustration of the use, of the main financial derivatives.
Introduction
Business has become increasingly international, and companies cannot ignore the impact of currency changes on cash flows, profitability, and their asset and liability position. No company is wholly immune—the cash received from exporting is affected by the relationship between the currency used by the customer to pay and the currency in which the cost of providing the product or service is denominated.
Many commodity prices have been volatile, rising and falling dramatically in recent years—driven by exploding or plummeting demand from fast-developing countries. Copper, tin, wheat, platinum, and of course oil, have risen dramatically, and this has had a significant impact on costs for many industries. Declines can be equally sudden, although falling costs often take more time to work through to market prices.
A spectacular result was the sudden collapse of several airline businesses in late 2007 and early 2008. Among them was EOS, a business-class only carrier operating mainly between London and New York, which started only in 2005. Also, Oasis Hong Kong Airlines, an innovative long-haul discount operator between Hong Kong, London, and Vancouver, MAXjet Airways, and some smaller low-cost US carriers, have all ceased trading very suddenly. Although other factors, such as reduced business travel and turbulent financial markets, have had an impact, the price of aviation fuel is the main cost driver, closely followed by the impact of currency changes—airlines pay all their costs in US dollars.
The risks extend beyond the trading sphere. Many banks have had to write down the value of their assets—largely complex “trading” securities. Finance is a global industry, and companies borrow and invest in many currencies. It is not sufficient that only financial people know how currency risks are created and managed.
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