Exchange rate or currency risk, Financial Management

Assignment Help:

A bond whose payments are made in foreign currency has unknown cash flows in domestic currency. This is because the cash flows are dependent on the exchange rate prevalent at the time the payments are received from the issuer. This amounts to currency or exchange rate risk because it is the risk that arises from the change in price of one currency against the other.

For example, an investor's domestic currency is the US dollar and he purchases a bond whose payments are in Indian rupees. If the rupee depreciates relative to the US dollar at the time a payment is made, fewer US dollars can be exchanged.

Consider an investor in Japan. His domestic currency is the yen. If he purchases a US dollar denominated bond, then he is concerned that the US dollar will depreciate relative to the Japanese Yen at the time the issuer makes a payment. If the dollar does depreciate, then he will receive fewer yen in the foreign exchange market.

Thus, the risk of receiving less domestic currency on bond investment where it makes payments in a currency other than the investor's domestic currency is called exchange rate risk or currency risk.


Related Discussions:- Exchange rate or currency risk

Evaluation of money-market hedge, Evaluation of money-market hedge Expe...

Evaluation of money-market hedge Expected receipt after 3 months = $300000 Dollar interest rate over three months = 5.4/ 4 = 1.35% Dollars to borrow now to have $300000 l

Cash discount, I am trying to solve this formula: 2/10, net 30. In the bo...

I am trying to solve this formula: 2/10, net 30. In the book I am reading they have 2% x 360 ------- ------ = 2.04% x 18=36.72% 100-2% (30-10) I want to know how the

share-appreciation mortgages (sams), High interest rates in the earl...

High interest rates in the early 1980s brought about this innovative mortgage arrangement. SAMs use inflation as a way of paying for the property. The lender agre

Baumol sales max theory, critically appraise baumol max. theory as an alter...

critically appraise baumol max. theory as an alternative objective of the firm

What do you mean by misappropriation of fund, Q. What do you mean by Misapp...

Q. What do you mean by Misappropriation Of Fund? Misappropriation Of Funds allotted for specific works under capital or Revenue demand but the expenditure is incurred for anoth

Financial leverage, Financial Leverage In accounting and finance, ...

Financial Leverage In accounting and finance, the amount of long lasting debt that an organization has in relation to its equity the longer the ratio, the larger the lever

Explain safe harbour rule, Q. Explain Safe Harbour Rule? Safe Harbour R...

Q. Explain Safe Harbour Rule? Safe Harbour Rule - Concept in statutes and regulations whereby a person who meets listed requirements would be preserved from adverse legal actio

What is alternative minimum tax, Q. What is Alternative Minimum Tax? Al...

Q. What is Alternative Minimum Tax? Alternative Minimum Tax (AMT) - Tax imposed to back up the regular income tax imposed onCORPORATION and individuals to guarantee that taxpay

Define moody or standard & poor credit ratings, Why do most international b...

Why do most international bonds have high Moody’s or Standard & Poor’s credit ratings? Answer:  Moody’s Investors Service and Standard & Poor’s offer credit ratings on several

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd