The importance of foreign exchange management for the survival and viability of the treasury function

312 words (1 pages) Business Question

22nd Jun 2020 Business Question Reference this

Tags: FinanceEconomicsQuestions

Disclaimer: This work has been submitted by a student. This is not an example of the work produced by our Essay Writing Service. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of BusinessTeacher.org.

Question

Discuss the importance of foreign exchange management for the survival and viability of the treasury function

Answer

Businesses with an international presence have to manage a series of risks of operating in a different country (Fetherston and Batten, 2002). This includes the prudent management of foreign currency exposure. While in the European union, many countries have the euro as their domestic currency, the rest of the countries of the world do not. Although under normal conditions a sudden fluctuation between two currency exchange rates is not likely, international businesses must implement various risk management techniques to limit their foreign currency risk exposure (Wachowicz and Van Horne, 2004). One of the most commonly applied practices is hedging, which is, in simple terms, a contract between two parties to use a given currency at a predetermined exchange rate, so that any fluctuation in the exchange rate cannot affect the business relationship. Commercial banks’ treasury function includes all activities which are necessary to manage the bank’s liquidity and to mitigate financial risk, including but not limited to risk of recording assets (and liabilities) in a foreign currency (Fetherston and Batten, 2002). If banks do not consider the risk associated with using a foreign currency, the effects of any sudden movement can be devastating. Financial statements and any other documents stakeholders use to receive factual information can be distorted if banks do not manage their foreign currency risk.

References

Fetherston, T. and Batten, J. (eds.) (2002) Financial risk and financial risk management. Amsterdam: Emerald Group Pub Ltd, New Milford, Connecticut, U.S.A. Wachowicz, J. M. and Van Horne, J. C. (2004) Fundamentals of financial management. Harlow, England: Financial Times/ Prentice Hall.

Cite This Work

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this question and no longer wish to have your work published on the UKDiss.com website then please: