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firm a is a us firm that operates in france, italy, belgium, netherlands, austria and spain. firm b is also a us firm that operates in india, china, brazil, mexico, germany, and australia. assume that both firms are in the same industry and that their financial characteristics (size, leverage, profitability etc.) are not significantly different. which of the two companies do you believe will be more likely to experience a more significant operating exposure to currency risk? what methods of operating exposure management can you recommend as better suited for firm a and for firm b?

Respuesta :

BhavikaKukreja

Firm A is more likely to experience a more significant operating exposure to currency risk due to its greater geographic diversity.

What is currency risk?

Currency risk, also known as exchange rate risk, is the risk associated with fluctuations in the value of a foreign exchange rate. It is the risk that changes in the exchange rate of one currency against another will reduce the value of an investment. Currency risk affects both businesses and investors, and can lead to significant financial losses.

Firm A is exposed to multiple currencies across different countries, increasing the risk of volatility in each currency. Firm B is only exposed to a few currencies, which limits the magnitude of the risk.

For Firm A, the best methods to manage operating exposure to currency risk include hedging the foreign exchange rate, utilizing currency options, and diversifying foreign investments. Hedging the foreign exchange rate will allow the company to lock in an exchange rate and protect against losses due to currency volatility. Currency options allow the company to limit their risk by allowing them to purchase an option to buy or sell a currency at a specific rate, thus allowing them to set a limit on their loss or gain. Finally, diversifying foreign investments will help spread out the risk across different countries, reducing the risk of large losses due to currency fluctuations.

For Firm B, the best methods to manage operating exposure to currency risk include hedging the foreign exchange rate, utilizing currency futures, and diversifying foreign investments. Hedging the foreign exchange rate will allow the company to lock in an exchange rate and protect against losses due to currency volatility. Currency futures allow the company to limit their risk by allowing them to purchase a contract to buy or sell a currency at a specific rate, thus allowing them to set a limit on their loss or gain. Finally, diversifying foreign investments will help spread out the risk across different countries, reducing the risk of large losses due to currency fluctuations.

To learn more about currency risk
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