Public trade company (Essay Sample)

Public Trade Company Student Name University Name International Exchange Rates Foreign exchange risks refer to the assessed probability that an investment value will change due to the fluctuations in currency exchange rates. Most international publicly traded companies deal with different levels of currency risks. This is more common with businesses that export/import goods to distribute in different regions such as Walmart. For example, Walmart imports products from the United States to the UK that will then be distributed in their Asda supermarkets throughout the UK CITATION Red16 \l 6154 (Redactile, 2016). For example, if Walmart invests $1 million in produce and the exchange rate between USD-GBP drops, the company loses profit. The UK has a fairly stable currency, it is known to fluctuate slightly. However, the nearby countries that operate under the Euro such as the Portugal, for example, have volatile currency risks CITATION FXC14 \l 6154 (FXCM, 2014). The European debt crisis affected all countries that operate on the Euro currency model and therefore, if Walmart should expand to Portugal it would have to analyze the currency risk of their investment. One of the most common methods of currency risk evaluation is through hedging. However, Walmart does not use this system. Therefore, the VaR (Value-at-Risk) calculation may be used to measure the risk of exchange CITATION Pap06 \l 6154 (Papaioannou, 2006). This model is comprised of three parameters which are used to estimate the currency risk. The holding period, confidence level, and unit of currency. Assuming that the holding period is of "x" amount of days with a confidence level of "y%”, then the VaR calculation will measure the maximum loss due to fluctuations. Thus, if the foreign exchange position has a 2-day VaR of $20 million at the 99 percent confidence level, the firm should expect that, with a probability of 99 percent, the value of this posit...