Question

Globalization is a continuous process whereby managers become aware of the impact of international activities on their companies. This process takes place in stages that include exporting, licensing joint ventures, wholly owned subsidiaries, and global sourcing. Each stage has implications for the type of accounting information reported.

Using the information you developed in the first submission lesson, in 2-3 pages, explain ways in which Striking Furs can protect itself against the losses that would arise from a sudden increase in the foreign exchange rate.

Answer 1

Ways in which Striking Furs can protect itself against the losses that would arise from a sudden increase in the foreign exchange rate are:

1. Hedge your bets

With the rise of US dollar, investors must protect themselves against foreign currency risk. Investors will be able to save from losses of fall in currency of the country where their investment is by hedging foreign assets in portfolio. By doing this,they will also not benefit from the increase in currency. Two ways to hedge is to buy a currency hedged mutual fund or invest in an exchange traded fund. With these funds, investors will only have to worry about stock market returns and their risk will be eliminated.

2. Short an overvalued currency

One way is to short the overvalued currency. Investors can only short the currency which they think will fall. Investors who use this way will sell a currency at a predetermined price on a future specific date. Investor also have to buy a currency for this transaction to take place. In this method, investors are exchanging one currency for another. Its like going long or short on stocks. Investors should go long on stocks that will rise and should go short on stocks that will fall.

3. Look for high interest rates

It is a good strategy but it can also be a risky one. Investors who are ready to take risk should go for this approach. With the U.S. dollar expected to rise, interest rate differences between US and other coutries will narrow. A lot of countries have lowered their interest rates due to recession, so the differential between US currency and other foreign currency becomes less attractive. Some countries still have high interest rates. If investors believe that country's rate can remain same at the current level, it will be beneficial for the investors.

4. Buy undervalued currencies

As undervalued stocks can be bought, undervalued currencies can also be bought. It is determined by looking at a country's account deficit, difference between its imports and exports. If the difference is large, its currency may be overvalued and will fall. Investors also look at inflation differences. Market changes could also have an effect on currency valuations. People think that US curriences are undervalued, so by default other curriences are overvalued.