International Business
Essay Preview: International Business
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International economic crisis and its impact – such as changes on international raw materials markets and currency exchange rates – on financial, goods and services markets have significant impact on revenues and earnings of MNEs. To eliminate such risks, financial investors and businesses use hedging instruments. There are three basic ways to manage currency risks. The first approach is not to hedge at all, assuming that currency fluctuations will wash out over a period of time; the second approach is to hedge fully, which may reduce the volatility of the portfolio. The third approach is to actively manage hedging, choosing when and how much to hedge. In short, hedging can be described as an insurance policy that limits the impact of foreign exchange (FX) risk.
Risk management
The monetary flows between an MNEs entities constitute FX risks whenever currencies appreciate or depreciate against each other. To tackle these issues BMW manages its own treasury centers in different regions – all reporting to a central office in Munich (1). These treasury centers plan and execute foreign exchange hedging strategies, derived from BMWs own model for currency valuation (2). BMWs hedging focus is long-term, with a scope up to 6 years. As BMWs cars are exported globally – incomes are generated in various currencies. Each unit sold is later measured in its “original currency” (where it was produced), which introduces the risk of translation exposure. To give an actual example; With rising sales in the US market, the amount of cars sold in the US market is currently higher than the amount of locally produced cars. The majority of BMW cars sold are therefore imported in order to satisfy the high US.