Financial Management (Currency Risk Management) Essay

Financial Management (Currency Risk Management) - Essay ExampleSuppose a U.S tourist flies from New York to London accordingly to Paris then to Munich and finally back to New York. When he arrived at Londons Heathrow Airport, he goes to the bank to check the foreign currency listing. The rate he sight for US dollar is $1 this means that $1 will cost him 0.6814. Assume that he changed $2000 for 1362.8 and enjoys a week vacation in London, spending viosterol while there are saving 862.8. At the end of the week, he travelled to Dover to catch the Hovercraft to Calais on the coast of France and realizes that he require to veer his 862.8 remaining Euro for Swiss francs. However what he sees on the board is the direct quotation between Euro and dollar and indirect quotation between franc and dollars. The exchange rate between any two currencies is called the cross rate. Cross rates are actually calculated on the soil of various currencies relative to the USD$. For type the cross ra te between Euro and French franc is computed as followsTherefore for every Euro he would receive 0.009923 Swiss franc and arrives at Czech Koruna, he again necessitate to determines a cross rate. This time between Swiss franc and Czech Koruna to find the cross rate he must divide the two dollar basis rate.First, we assume that our traveller had to calculate the entire cross rates. For retail transactions it is customary to display the cross rate directly instead of a serial of dollar rate. Second, we assume that exchange rate remain constant over time. Actually exchange rates vary every day, often dramatically.