Identify The Possible Exchange Rate Risk
Identify The Possible Exchange Rate Risk
Identify The Possible Exchange Rate Risk
The city-state confirmed 24 cases of new coronavirus, while China's coronavirus death count
initially reached 500.
In spite of both the economic effects of coronavirus epidemic, the exchange rate is lower.
Singapore conducts strategy by exchange rate arrangements, rather than interest rates like
other banks do, enabling the Singapore dollar to grow or fall within an unknown monetary
range against the currencies of its major trading partners..
2. To demonstrate above exchange rate risk exposure incurred by the outbreak,
please provide a forecast in ONE foreign exchange rate (FX) incurred in
exposure on 18, 19 and 20 May 2020, respectively.
Answer:
During the outbreak of COVID19, a review of foreign exchange risk management of the
clients who are listed in the stock exchange of the Singapore. The following working are
derived on the figures based on the MNC listed in the Singapore stock exchange. The details
are as follows;
Current Price
SGD 296.16
USD 209.07
Further, it is assumed that inflation will reduce up to 0.4% in Singapore While it is expected
that inflation will reduce up 2.1%. So prices are forecasted on the estimated basis in the
absence of the actual data. Interest rate is expected to be 1.20% by the end of this quarter so
there are some basis point will be change in 18, 19 and 20 May.
The above rate is on the 12 month fixed deposit
3. Comment on how the MNC could manage the corresponding risk based on (1)
and (2).
A currency's value varies based on different market influences, including inflation, interest
rates, account balances, terms of exchange, political and economic success etc. which
influences companies and people involved in foreign transactions. Economic risk
comes from market shift of one currency over another. Any time shareholders or companies
face foreign exchange risk. This vulnerability failed to guarantee cash flows, unsystematic
uncertainties, foreign funding, financial uncertainty, property of shareholders.
Diversification:
Diversification is a tool for managing the risk that allow building a portfolio of different
investment. The theory behind this method is based on the different kind of investment on
average and high returns as well as low return. However, investors or MNCs do so with their
money in more than one currency.
Natural hedging:
A risk management strategy in order to mitigate the risk is a natural hedging, in which
management to manage the risk by investing in those assets that are negatively correlated.
This can be implemented when management exploit their operating procedures, for example,
they cause costs in the same currency that leads to the generation of income where the
exchange rate risk is low.
Cross Hedging: Cross hedging is also used to convert more than one currency, for
example if an importer accepting payment in Chinese Yuan cannot be translated
directly to INR such that it is translated to USD first and then INR.
Foreign currency:
Denominated debt: A Trade will allow use of the loan in two currencies. Home-
currency loan with exchange-rate danger and other loans in foreign currency free of
exchange-rate threat
Money market Hedge: A money market hedger is a method used to secure and lock
the value of foreign exchange in an organization's home currency. Subsequently, a
money market hedger can enable a household organization to decrease its risk or
when directing business exchanges with foreign organization in the financial market,
which are liquid like Treasury bills, bankers acceptances, and commercial papers are
used to trade. .
Currency Swaps:
It is a consent to exchange between two parties to fixed or floating interest rate financing in a
one currency for fixed or floating interest rate in a second. It additionally give a client to re-
denominate financing starting with one currency then onto the next.
.
MNC will control the exposure using the aforementioned methods; use the correct strategy at
the right moment. MNC's should handle foreign risk includes daily foreign market tracking
and lots of flexibility. This could help balance and raising the cost of foreign exchange.