PE II: Foreign Exchange Risk management

Question 1

How does ER fluctuations directly affect bottom line (Profit) of a small business?

Answer 1

Short term: could be a problem since the company selling could suffer from a negative change in exchange rate of there home currency; even if in the long term they are “even” because small business are often struggling with short term cashflow

cannot pass the risk to the customer since it is the convention of the seller to receive payment in their home country’s currency

Question 2

What is the strength and weakness of INVOLVING THE CUSTOMER as a risk mitigation strategy?

Answer 2

customers usually are not happy to bear the currency risk and pay on the time of job completion-> make the selling company less competitive–> shorter quotation acceptance times and/or larger deposits

Question 3

What is the strength and weakness of INTERNAL PROCESS CHANGES as a risk mitigation strategy?

Answer 3

quotation and payment process?

Question 4

What is the strength and weakness of FOREIGN EXCHANGE SERVICES as a risk mitigation strategy?

Answer 4

a foreign currency bank account–> significantly shortens the time window for potential exchange rate fluctuations
-> forward exchange contracts do not seem applicable for small businesses