STRATEGIC FINANCE

Strategic Finance

Abstract

When a company wants to expand the operations to other countries, many factors are to be considered. Foreign currency exchange, foreign currency translation, hedging are the main factors. These are directly related, when the transactions are made in different currencies depending on the host and home countries. The exchange rate risk is captured by movements in the exchange rate in the opposite direction of this scheme fluctuations between the exchange rates changes in the value of one currency in terms of another are variations in the exchange rate affecting the total wealth of the traders who hold positions in foreign currency. The risk can define as the ability to incur losses because of the direct effects of exchange rate changes on expected cash flows. Exporter receives foreign currency for the goods sold, will lose from the depreciation of foreign currencies in relation to national, then as an importer, make payment in foreign currency, will lose from the appreciation of foreign currencies relative to the national. Foreign currency translation using direct and indirect rates of exchange and the calculation of cross rates between pairs of currencies. The currency exchange is done through spot rate is defined as the one which applies to 'on the spot' delivery of currency. In spot transaction, the actual exchange of money for goods takes place with minimum possible delay. The spot rate is the value of currency under consideration at that very moment. Forward rate is the one applicable to a transaction, which will occur at specified point of time in the future. Risk management plays a crucial role when dealing with currency exchange. Hedging techniques are used to minimize the risk. In investment, a hedge is a place established in one market in a try to counteract exposure to cost alterations or fluctuations in some converse place with the aim of minimizing one's exposure to redundant risk. There are numerous exact economic vehicles to complete this encompassing protection principles, ahead agreements, swaps, choices, numerous kinds of over-the-counter and derivative goods, and possibly most popularly, futures contracts. One cause why businesses try to hedge these cost alterations is because they are dangers that are peripheral to the centered enterprise in which they operate. For demonstration, an shareholder buys the supply of a pulp-and-paper business in alignment to gain from its administration of a pulp-and-paper business. She does not purchase the supply in alignment to take benefit of a dropping Canadian dollar, understanding that the business trade items over 75% of its merchandise to overseas markets. This is the protection contention in favor of hedging. Similarly, businesses are anticipated to take out protection contrary to their exposure to the consequences of robbery or fire. Net Present Value is an accounting term used in capital budgeting where the present value of net cash inflow is subtracted from the present value of cash outflows. Then this value is compared with projected profit ratios for the project in the future. NPV is useful, particularly to investors, because it compares ...