International finance and management Essay Example | Topics and Well Written Essays - 1500 words

International finance and management - Essay Example hods for managing the said exposures are forward contracts, money market contract, currency options, currency swaps, leading and lagging and choice of currency invoice. Lastly, a brief illustration on how to use the money market and forward contract is provided. Medco Ltd is a pharmaceutical company based in the U.K. the company deals in exports and imports of medicines throughout Europe. The nature of the company’s transaction presents a risk as a result of the fluctuation of the foreign exchange rates. The company is planning to invoice a customer in France for 500,000 euros, payable in six months. The company’s managing directors seek advice on whether to implement money market or forward contract hedging strategy. This essay presents the risks in relation to the changes in exchange rate, the causes and factors affecting foreign exchange rate risks, methods of dealing with the forex risks and a mathematical illustration to help the company’s managing directors decided between the two hedging strategies (money market and forward contract). Foreign exchange is a market concept that means, converting currency of one country into that of another. Therefore, foreign exchange market is the market that hosts the currency conversion process (Baxter & Stockman 1989). The process of currency conversion depends on exchange rates. An exchange rate is the cost charged for converting the value of a country’s currency into the value of another. A spot exchange rate is the rate used in an instant currency conversion agreement between two or more parties (Dornbusch 1976). Spot exchange is carried out in a spot exchange market, which is part of the foreign exchange market. On the other hand, forward exchange rate is the rate agreed on today, to convert currencies at a future date specified in the agreement (Weithers 2011). The fluctuating exchange rate could present an unfavorable situation to a company if the local currency is rendered less valuable, (increased