The task is to review EuroJet's foreign exchange exposure Coursework

The task is to review EuroJet's foreign exchange exposure - Coursework Example In addition to this, as has been noted in the case study that the company plans to opt for one of the two options for expansion, which include expansion of network to intercontinental destinations and growth of existing network, the report also provides an evaluation of the risks associated with these two options in terms of foreign exchange risk and international environment risks. Besides this, a critical review of the literature pertaining to foreign exchange risk has been provided in the appendix at the end of this report. Management of Foreign Exchange Risk Having noted the fact that Euro Jet is faced with a risk of foreign exchange exposure due to fact that its revenues are earned under different currencies’ denominations, it is therefore pertinent to understand first that what is foreign exchange exposure risk and how it influences a company’s revenues. Moreover, the understanding of different risks and methods to manage them is likely to result in determining an approach which is more suited to the needs and requirements of Euro Jet. Foreign Exchange Exposure Risk The foreign exchange exposure risk refers to the expected gain or loss incurred due to fluctuations in the exchange rate (Arnold & Kumar, 2008; Moles et al., 2011). The foreign exchange risk resulting from fluctuations in the exchange rate may impact the overall cash flows, revenues, assets and liabilities and other items of financial statements of a company. In other words, the changes in foreign exchange rates result in the changes in a firm’s value, which may be favourable or an unfavourable change (Madura, 1989). Companies having operations in more than one country, like Euro Jet, are projected to risks associated with foreign exchange fluctuations. The risks associated with foreign exchange fluctuations may be categorised into three main types, which are as follows: Transaction Risks This risk relates to the risks associated with cash flows, i.e. the impact of changes in the exchange rates on revenues receivable, expenses payable, and other payments to be made to shareholders and third parties (Arnold & Kumar, 2008; Moles et al., 2011). Translation Risks This risk refers to the impact of change in foreign exchange rates on the value of a company. The impact of changes in foreign exchange rates is translated and reflected in the balance sheet of the company (Arnold & Kumar, 2008; Moles et al., 2011). Economic Risks This risk relates to the exchange rate fluctuations translated in the present value of operating cash flows to earned in future by a company. In other words, this risk relates to impact of changes in foreign exchange rates on the earnings of a company (Arnold & Kumar, 2008; Moles et al., 2011). Keeping in view this discussion of the foreign exchange risk and its various types, the approaches for managing foreign exchange exposure risk can be discussed as under. Approaches for Managing Foreign Exchange Exposure Risk In order to manage f oreign exchange exposure risk, the most common and widely applied approach by both financial and non-financial business entities is the use of hedging. However, hedging has also various types and therefore various hedging approaches can be followed by business entities, and particularly by Euro Jet. Hedging refers to dealing with risk for a company resulting from exposure to