AssignmentName: Unit 4 Individual Project Deliverable Length: 750–950 words Details: A leader in your firm has been studying the foreign exchange market for a number of years and believes that she can...

International risk 1

Running Head: INTERNATIONAL RISK.
Name
Institution
Date
International risks 2

According to Weerapana (2010), most of the activities that involve foreign exchange
positions are mostly speculative but the problem is that exposure to the risks associated with
foreign exchange is not the real meaning of exchange rate speculation. In foreign exchange
speculation, the expected returns are dependent on the changes in the rate that is expected or
the difference between forward rate and the future expected exchange rate. Through
speculation the expectations are that relevant prices will change in relation to the ruling price
however this is not a gain from the use or transformation in them or even transfers between
markets. Foreign exchange speculation arises from bilateral exchange rates. An option to the
leader is selective hedging strategy by beating the market to be successful
Spot market
The firm having $500,000 would like to invest the amount in the spot market at a rate
of $1.3435 to the euro. If the exchange rate changes to $1.41 in 12 months the investment
would change from ($500,000*$1.3435) =$671750 to ($500,000*$1.41) =$705,000. The
difference in this case would be an increase of . Ignoring exchange rate fees, the firm
could evaluate the benefits that could be derived if the investment is done after twelve
months while taking into account the rate of inflation or if it is done at the moment at a cost
of $671750 as compared to the same investment being undertaken in the future at a higher
cost of $705,000. Since the firm has the funds at the moment, it would be easy for it to invest
however the situation could have been different if the amount is borrowed therefore carrying
borrowing costs with it. Therefore the difference...