Financial Management (Currency Risk Management) Essay

pecuniary Management (Currency Risk Management) - Essay ExampleSuppose a U.S tourist flies from New York to capital of the United Kingdom then to Paris then to Munich and finally back to New York. When he arrived at Londons Heathrow Airport, he goes to the bank to check the foreign currency listing. The appreciate he observed for US dollar sign is $1 this means that $1 will cost him 0.6814. Assume that he changed $2000 for 1362.8 and enjoys a week pass in London, spending 500 while there are saving 862.8. At the end of the week, he travelled to Doer to catch the Hovercraft to Calais on the coast of France and realizes that he needs to exchange his 862.8 remain Euro for Swiss francs. However what he sees on the board is the direct quotation between Euro and dollar and validatory quotation between franc and dollars. The exchange rate between any two currencies is called the cross rate. Cross pass judgment are actually calculated on the basis of various currencies relative to th e USD$. For example the cross rate between Euro and French franc is computed as followsTherefore for every Euro he would receive 0.009923 Swiss franc and arrives at Czechoslovakian Koruna, he again needs to determines a cross rate. This time between Swiss franc and Czech Koruna to watch over the cross rate he must divide the two dollar basis rate.First, we assume that our traveller had to calculate the entire cross rates. For retail transactions it is customary to display the cross rate this instant instead of a series of dollar rate. Second, we assume that exchange rate remain constant over time. Actually exchange rates vary every day, often dramatically.