currency exchange nature with its impact on importation and exportation of alpha and omega corporations

 currency exchange nature with its impact on importation and exportation of alpha and omega corporations

Increasing globalization and heightened volatility and currency changes in exchange rates in the modern era have a significant impact on the operations and profitability of companies. Not only does the volatility in exchange rates affects multinational and large firms, but also small and medium-sized companies, with those operating only in their home countries also included. Investors should not be left out in familiarizing themselves with understanding and managing exchange rate risk due to the enormous effect it can have on their holdings, as it is also a subject of explicit significance to business owners. Travel, imports, exports, and the economy are affected by currency exchange rates. This paper discusses the currency exchange nature with its impact on importation and exportation of alpha and omega corporations. The fall of the value of the euro will be used as the primary example, how alpha and omega firms will be affected by the fall in the value of the euro.

Alpha, for instance, imports its raw materials from the U.S. and sells its finished products in Germany while omega buys its raw materials from Germany and sells its products to the U.S.A, in the event of a fall in the value of the euro; it means depreciation in the value of the euro against the dollar. In this case, Omega Corporation will benefit more than Alpha, since exporting goods to the U.S. will become cheaper and more expensive for those who import products from the U.S. The exports will become more competitive and on the other hand imports more expensive with depreciation in the exchange rate. It will become cheaper for the U.S. individuals to buy goods from Germany hence increasing the number of exports from Germany to the U.S.

Furthermore, inflation will increase in the omega corporation since the importation of goods will be more expensive. The demand for products will also pull the rise since Omega goods will be more attractive due to its low prices caused by exchange rate depreciation by the euro.  Also, inflation will be high since there will be no incentives from omega corporation to cut any costs. With the increase in demand for export goods, Omega firm will also be able to generate more funds hence improving its productivity level and create more job opportunities in the long run, thus reducing the living standards. On the other hand, Alpha firm will heat hard by the drop in the value of the euro since it will make importation of U.S. goods into Germany more expensive hence reducing Germany imports from the U.S. Buying products from the U.S. will relatively become more expensive.

All the different currency exchange transactions are included in the foreign exchange market. The foreign exchange market is usually defined by the supply and demand and consists of selling domestic currency at a particular value or rate to buy foreign money. At long last, businesses and investors with international operations will, at some point, have risks in the movements of the exchange rate. They, therefore, adopt measures of minimizing the effect of the potential adverse movements. This strategy is what is referred to as hedging, and it entails the use of instruments of finance to raise the level of protection against fluctuations of currency. Alpha and Omega corporations can, therefore, use hedging to make their own cost structure, cash flows, and transactions more predictable and stable. The tools they can respectively use for hedging themselves against foreign exchange risk include; forward, debts, future, swaps, and options contracts.

Forward contracts

The exchange rate, an amount as well as the date for currency exchange between two parties, can be specified in the forward contracts. Parties can close deals and plan at current rates using the forward tool. With the forward contract, for example, the Alpha or Omega Company may agree to buy or sell a product to an American buyer respectively. It will ship the product monthly for a year. A forward is signed stating that the product’s payment will be made at the end of the year at the current exchange rate. The contract, therefore, guarantees that the amount for the product will remain the same in terms of dollars or euros agreed upon even if the exchange rate changes.

Future contracts

Conditions for a currency exchange involved in financial instruments that include the rate, amount, and expiry date are included in the future contract tool. The non-compliance risk of forwards can be eliminated by the future device; hence, they are often used where there are risks of credit. The corporations, that is, Alpha and Omega, can use the future tool to hedge themselves against exchange risk in various ways. For instance, investors or businesses might hedge devaluations by selling futures, and the hedge appreciates by buying futures. Omega firm can, for example, receive 25 million euros in three months, hence making the company sell the futures for delivery in 90 days. The expected amount will be protected if the euro will depreciate against the dollar. The future, therefore, will help the two firms minimize the exchange risks.

Debt operation

Debt tool involves the idea of firms borrowing foreign currency. While hedging the exchange rate risk, an investor or business owner may borrow the amount they expect to receive in the future in foreign currency and exchange to local currency then depositing it. The debt is paid for using the foreign money earned by the investor. For instance, the corporations may be expecting a payment let’s say of 150USD million, they, therefore, borrow from an American bank 150USD million and exchange it immediately to euros and then deposit it to company bank based in Germany. They then pay the American bank once they receive the payment, and in that time, the exchange rate will not be against them.

Swaps contract

Currency swaps are also intended to hedge exchange rate risk exposure or decrease the borrowing cost of foreign currency. It involves the exchange of interests between two parties in different currencies. An interest rate swap is similar to a currency swap with the exception that there is always an exchange of principal in the currency swap, while the principal doesn’t change hands in the interest rate swap. The counterparties exchange notional amounts in the two currencies on the trade date in currency swap. For instance, one party gets 14USD million, while the other gets 10 million euros. This, therefore, implies an exchange rate of 1.4. They will then swap using the same exchange rate once again at the end of the agreement to close the deal. The exchange rate can change dramatically over time in the market place since swaps can last for an extended period depending on the individual agreement. Thus the reason currency swaps are preferred by most firms since they know the exact money they will get and have to pay back in the future.

Option contract

Options strategy is another financial instrument Alpha, and Omega firms can use to protect themselves against exchange risk. They provide another alternative to hedge the risk of the exchange rate. An investor or business owner through the currency options are able to gain the right to buying or selling a particular currency in a given amount at the strike price on or before the expiry date. For instance, traded currency options can be available EUR 10, 000, USD 10,000 denominations making them suitable for both corporate and individual investors.