Financial Management Essay Example | Topics and Well Written Essays - 2000 words - 4

Financial Management - Essay Example This paper aims to explore the importance of managing foreign exchange risks as well as the methods of managing it that most multinational companies employ. Also, by analysing the practices of two companies when it comes to managing foreign exchange risks in line with good academic practices, certain recommendations with regard to risk management practices for a fast-growing listed company in the UK can be proposed in the process. In this age of globalisation, many companies conduct businesses in countries other than their own. With opportunities in new markets come various types of risks—business risks, macro environmental risks, as well as foreign exchange risks (Pattichis et al. 2004). When a company conducts a business outside the country where it is based, the company is said to be exposed to some foreign exchange risks, where the fluctuations in the differences between the home countrys currency and the host countrys currency may result in adverse impacts in the companys income from international operations, as well as its balance sheet. Companies need to protect themselves from these risks; a drastic change in the exchange rate between the home countrys currency and that of the host country can result in significant gains or losses (Nazarboland 2003). Aside from this, those which are otherwise very profitable international ventures of the company, due to fluctuations in the foreign exchange rate, may seem to be a losing business. For companies that have significant foreign direct investments across the globe, in order to assess more accurately the performance of their international subsidiaries, managing the foreign exchange risk is very important (Collier et al. 1990). Also, these differences will have a significant effect on the parent companys reported earnings as well. When companies have investments outside their home countries, these investments are usually exposed to foreign