Currency risk management in an era of financial turmoil

Ing. Francesco Igino Gualano

Master's thesis

Abstract:

This work focuses on the currency risk management in a period of financial crisis. Crisis are often characterized by volatility in the exchange rate and this means higher currency exposure for the firms in the short term. In the medium-long term, the trend of the exchange rate also impacts the firms’ profit margin. In the analytical part, different Czech firms (mainly exporters) are presented as real example of the impact of the exchange rate and the Value at Risk model (using historical simulations method first, and then Exponentially Weighted Moving Average) is also applied to a Czech company exporting in EUR. The results are in line with the thesis statement, namely the exchange rate volatility in the short term has a negative impact on the firms’ situation in terms of higher currency exposure, as found with the VaR method. In order to mitigate the currency exposure in the short term, firms should hedge the currency risk through derivative instruments, which are also described in the text. In the medium-long term, on the other hand, the firm should forecast the main trends of the exchange rate and take it into account in its strategic plan.

Keywords

Currency risk, currency exposure, exchange rate, transaction exposure, Purchase Power Parity, Interest rate parity, Fisher effect, financial crisis 2008, hedging, derivative instruments, volatility, Exponentially Weighted Moving Average, Value at Risk.

Language used: English

Date on which the thesis was submitted / produced: 30. 4. 2013

Thesis defence

• Date of defence: 27. 6. 2013
• Supervisor: Ing. Petr Mach, Ph.D.
• Reader: MBA Jaromír Stemberg

University of Finance and Administration

Master programme / field:
Economics and Management / Business Management and Corporate Finance