The following points highlight the techniques used to manage foreign exchange risk. The techniques are: 1. Doing Nothing 2. Pre-Emptive Price Variation 3. Risk Sharing 4. Maintaining a Foreign Currency Bank Account 5. Transfer Pricing 6. International Forfaiting 7. Discounting of Bills of Exchange 8. Money Market Operations and a few others. Technique # 1. Doing Nothing: This method suggests [...]
The following points highlight the five main theorems on foreign exchange rate determination. The theorems are: 1. Law of One Price 2. Interest Rate Parity Theorem 3. Purchasing Power Parity Theorem 4. Fisher Effect 5. International Fisher Effect. Theorem # 1. Law of One Price: The law of one price asserts that when there are no significant costs or other [...]
In a commodity market, the prices undergo considerable degree of fluctuations. The reasons for price fluctuations may be crop failure, bad weather and demand-supply imbalances. These fluctuations in turn lead to price risk. This price risk is largely borne by the farmers and industries where agricultural commodities are used as raw materials. If the participants hedge against this price risk, [...]