Foreign Exchange Rates and Exchange Rate Risk Essay

Foreign Exchange Rates and Exchange Rate Risk - canvas ExampleThe rates therefore are either determined through the market forces or by the central bank of the country to maintain and manage them at a reasonable level.It is also beta to understand that when global staunchs deal in foreign exchange they also expose themselves to various risks. all(prenominal) firm which deals in foreign bills therefore have to fact these risks and use different hedgerow methods. These methods vary depending upon the needs of the organization as well as the nature of the transaction. It is however, critical that each firm has to face these risks and must also manage them in order to avoid losses or centralize the risks and manage it at acceptable level.An exchange rate is the rate at which one currency is really converted into another currency. It is also the hold dear of currency of one country in terms of the value of the currency of another country. The value of two currencies is mostly det ermined in the open market in which many buyers and sellers actually determine the value based upon overall demand and supply of each currency.It is of the essence(p) to note that there are usually 2 types of exchange rates i.e. spot rates and prior exchange rates. Spot exchange rates are the rates which are offered on the spot for the purchasing and selling of any particular currency. However, forward exchange rates are determined for the currencies to be purchased or sold in given future date.When international organizations actually receive their payments in foreign currency, they trace foreign currency dealers to offer them either spot or forward rates. Foreign currency dealers however, forever quote two different rates i.e. the rate at which the dealer will buy the currency and the rate at which he will sell the currency to the organization. The difference between the bid and involve price (buying and selling price) is considered as the