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Rupesh Roshan Singh, Lovely Professional University Unit 6: Economic Fundamentals and Foreign Exchange Risk Exposure

Unit 6: Economic Fundamentals and Notes
Foreign Exchange Risk Exposure

CONTENTS
Objectives
Introduction
6.1 Economic Indicators

6.2 Financial and Socio-political Factors
6.3 Foreign Exchange Risk Exposure
6.3.1 Exchange Risk

6.3.2 Types of Exposure
6.4 Tools and Techniques of Foreign Exchange Risk Management
6.4.1 Market Imperfections/Inefficiencies that Characterize the Indian Markets
for these Instruments
6.5 Summary
6.6 Keywords
6.7 Review Questions
6.8 Further Readings

Objectives

After studying this unit, you will be able to:
Explain the economic indicators
Discuss the financial and socio-political factors
Explain the Foreign Exchange Risk Exposure

Discuss the Tools and Techniques of Foreign Exchange Risk Management

Introduction

This unit provides an overview of economic indicators, financial and socio-political factors and
the various types of the foreign exchange risks faced by MNCs. A very important dimension of
international finance is the role of economic fundamentals and exposure management and there
has been an increased interest by MNCs in recent times in developing techniques and strategies
for foreign exchange exposure management. The unit discusses the economic fundamentals or
indicators and various kinds of exposure and then goes on to discuss the tools and techniques of
exposure management.
Foreign exchange risk is linked to unexpected fluctuations in the value of currencies. A strong
currency can very well be risky, while a weak currency may not be risky. The risk level depends
on whether the fluctuations can be predicted. Short and long-term fluctuations have a direct
impact on the profitability and competitiveness of business.

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