Exchange Rates Volatility and Risks Essay

thither ar a number of factors that could change the value of a property with respect to another. If the pompousness localize in a region is slump with respect to the fanf atomic number 18 rate in other countries, the prices of goods and work in the rural with the low inflation rate become attractive for conflictingers. However, increases in demand for the goods and services in the country with a low inflation rate are expected to appreciate the value of the countrys currency (Ana, FS 2004). Changes in interest place tend to have a similar push on mass meeting rates. Foreigners would like to invest in countries where the rates of repossess on enthronement are high.As the demand for investment in a particular country increases because it enjoys a high interest rate in comparison with other countries the value of its currency is expected to appreciate (Ana, FS). The exchange rates at a given time are in like manner dependent on differences between the up-to-the-min ute account balances of countries. If a country is running a latest account deficit, it generally agent that the country is importing more than it is exporting, so therefore investments in the country may not be considered lucrative. A country with a veritable account surplus, on the other hand, is considered attractive for investment.As a division of fact, the currency of this country is as attractive to immaterialers as its products and services. By change magnitude their demand for the countrys products and services, foreigners are expected to appreciate its currencys value. As its currencys value appreciates, however, investing in the country becomes less affordable (Ana, FS). When a country is experiencing a current deficit, its government may decide to borrow money to finance the ego same deficit. Inflation may ensue. Moreover, if the lenders believe that there is a default attempt, they may decide to sell off the debt on the open market.In the United States, treasur y securities may be used for this reason. In every case, the selling of the debt on the open market is expected to exert down pressure on the foreign exchange rate (Ana, FS). Exchange rates are also actuateed by the governmental climate of a country at any given time. Political disturbance in a country may result in a red ink of investor confidence in its currency. Conversely, countries that enjoy relatively stable political climates are able to attract investment and experience appreciations in the values of their currencies (Bergen, JA 2007).Undoubtedly, a firm must be able to manage the different kinds of political risks that it may have to face by investing in a particular country. There are triple main types of political risks firm-specific risks, country-specific risks, and global-specific risks. Of the three types of political risks, firm-specific risks include the capriciousness of exchange rates. These risks are expected to affect the multinational enterprise at the co rporate and/or project level (Frenkel, M, Karman, A, & Scholtens, B 2004). For this reason, an exchange rate risk or currency risk from the perspective of an American investor is defined as followsThe risk that a furrow operations or an investments value get out be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a reliable investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects cablees, but it can also affect individual investors who make international investments (Exchange Rate Risk 2007). There are three types of movie to exchange rate volatility that an investor may have to confront.The firm faces translation exposure when its reported accounting meshwork must be adjusted as a result of foreign exchange rate fluctuations. Transaction exposure is the result of the firms agr eement to undertake certain foreign exchange transactions during the current period (Bolster, P 2006). As an example, an importer may sign an agreement to corrupt a specific quantity of goods from Country A and pay a certain amount of money to the country in ninety days. done this agreement the importer is obligated to pay Country A by buying the units of Country As currency in ninety days. beholding that the exchange rate may change in ninety days, the importer is open to currency risk (Bolster, P). Lastly, investors may have to face economic exposure to exchange rate volatility. This type of exposure to exchange rates volatility results from the need of the firm to conduct business activities in another country in future. Bolster, P describes economic exposure as the need for foreign exchange transactions and exposure to exchange rate fluctuations that results from future business activities. The experience of Toyota in the U. S. utomobile market helps to explain this type of exposure to exchange rate volatility. The company had managed to attain a sizeable market donation in the United States. But, when the Japanese yen started to appreciate in notification to the U. S. dollar, the revenues of the company dropped significantly (Bolster, P). The good news is that it is possible for investors to manage the political risks, including the firm-specific risks that they may be exposed to. Limiting, diversifying, and hedging are all operable methods of managing political risks (Frenkel, M, Karman, A, & Scholtens, B p. 20).