Foreign Exchange Risk Case Study Example | Topics and Well Written Essays - 750 words

Foreign Exchange Risk - Case Study Example Another option to mitigate foreign exchange risk is the adaptation of foreign exchange services from a foreign currency exchange specialist. These specialists include the Canadian Forex and local banks in Canada. These experts will help reduce the risks associated with frequent transfers from Canadian dollars to the US dollar. This is done by entering into Canadian dollars earlier, and banks will only convert it during the payment period, so there will be no risk. The final and recommended option for mitigating risks is the purchase of foreign exchange contracts. In this case, Alliance will pay more cash than required to cover the costs of mitigation. This will cover any risk that may occur between the time when the money was deposited and the time of payment for the equipment to the supplier. For example, the price of equipment is $ 500,000, when the exchange rate is C $ 1.00 = U S 1.00. If the Alliance does not use the forward exchange contract and the payment time occurs when the exchange rate has moved by C $ 1.00 = 0.95 US dollars, then the Alliance will have to pay 526315 as the final price. This is $ 26,315 more than the original amount. But when the Alliance decides to buy a forward foreign exchange contract and which they decide with the bank to be one percent of the amount of Equipment, then the Alliance will have to pay 505,000. Therefore, the design concepts of the alliance will not worry about fluctuations in the exchange rate. They will save more than 21,000 US dollars.