Managing the Volatility of Currencies and Commodities in SCs

Question 1

What is the main influence that causes currencies to fluctuate?

Answer 1

Supply and demand for the currency
Volumes of international trade
Levels of confidence in the counties host government
Government policies - perceived effectiveness
Government intervention
Speculation
Inflation
Interest rates

Question 2

What are the 3 main exchange rate risks?

Answer 2

Transaction - short term exposure to volatility, applies to importers and exporters
Economic risk - medium and long term exposure, to fluctuation, impact cash flows and financial perf
Transactional risk - gain or losses when accounting results of foreign business units are translated into domestic currency

Question 3

What is the main way to minimise or eliminate exposure to exchange rate fluctuations?

Answer 3

Hedging - forward exchange contracts, agreement with bank, buy or sell a specific amount

Question 4

What are the different methods of hedging?

Answer 4

Currency futures - specialist futures exchanges, obligation for future purchase or sale of a specified amount on a specific date
Currency options - for a premium, right to buy/sell a specified amount at a specified rate on a date
Currency swaps - contractual agreement, swap equivalent amounts for an agreed period

Question 5

Define commodities

Answer 5

Unbranded and undifferentiated products (iron ore, crude oil, salt, tea, coffee, copper, gold)
Prices highly volatile - can erode margins

Question 6

What can influence the prices of commodities?

Answer 6

Weather conditions - reduce supply
Catastrophe - mines or other production facilities close
Difficult to source

Question 7

What are the 2 different commodity categories?

Answer 7

Hard - natural resources, extracted through mining

Soft - natural resources which are grown, fruit, veg, livestock, can be processed into a secondary commodity

Question 8

What’s the main method of hedging in commodities?

Answer 8

Futures Contract - particular quantity and a specified date

Question 9

What is a Contract for Difference?

Answer 9

Contract between 2 parties who are speculating on the movement in price of the commodity
Agreement to exchange the amount which the commodity has changed in value over an agreed time frame