Foregin Exchange Risk

6 Pages 1537 Words

FX Risk

In 1944, the Bretton Woods fixed exchange-rate system was created based on the gold exchange standard. (Solnik, Bruno 1996, 3-7). Each national currency was assessed according to its gold value and was freely convertible into gold. Governmental monetary authorities rarely adjusted these fixed FX rates. In the early 1970s, as growing international trade and financial transactions put stress on the gold standard, a series of planned and unexpected events led to the end of U.S. dollar/gold convertibility in 1971 and abandonment of any link to gold’s price with a new system of floating currencies in 1976.

The volatility of floating FX rates has a significant impact on the profits of multinational businesses. Most researchers have measured the impact by studying how changes in FX rates affect market capitalization. (Bodnar, Gordon M. and Marston, Richard C., 1998).

Researchers consistently find that periods of significant FX movements produce substantial changes in stock market capitalization. Approximately 25 percent of U.S.-based multinational businesses had significant FX exposure between 1995 and 1999, (Ihrig...