What is meant by foreign exchange rate? What specific problems does foreign exchange present in an organization? How could an organization needing Euros in six months protect itself from currency fluctuations? (200 word)
Exchange rate is the rate at which the currency of one country can be exchanged for the currency of another country. For example, if you want to exchange dollar with pound, the higher the exchange rate for one pound in terms of one dollar, the lower the relative value of the dollar. Exchange rate puts organizations at exchange risk. For instance, if an organization has imported goods from abroad and has committed to pay in future in the foreign currency, the organization might end up paying more due to the weakening of local currency. This will affect the profitability of the business and forecasts and budgets. An organization that needs Euros in six months can protect itself from currency fluctuation by taking out a money market hedge. The organization can buy Euros right now by calculating the present value of the amount needed in six months discounted at the rate of interest being offered by the banks on the deposit of Euros, effectively locking itself into the current exchange rate. The organization will then deposit the Euros in an interest bearing account for six months. After six months, the principal amount plus interest will equal the amount the company requires.
What is globalization? Why has globalization become such an important issue over the last ten years? How will globalization change financial management in the years ahead? (200 word)
Globalization means reductions of barriers in order to carry out business activities a