International financial management and the ruble exchange rate risk
канд. экон. наук, доцент кафедры Экономики и управления бизнес процессами, Сибирский федеральный университет (660041, Россия, г. Красноярск, пр. Свободный, 79; e-mail: firstname.lastname@example.org) A.S. Shreider,
студент, Сибирский федеральный университет (660041, Россия, г. Красноярск, пр. Свободный, 79; e-mail: email@example.com)
Аннотация. В данной статье рассматривается система международного финансового менеджмента в аспекте управления валютным риском. Рассмотрены этапы управления валютным риском в международной компании. Анализ волатильности курса рубля и падения цен на нефть в конце 2014 года выявил недостатки системы управления валютными рисками в российских компаниях и обозначил необходимость дальнейшего совершенствования стратегий хеджирования и всей системы управления валютным риском в целом.
Abstract. This article deals with the system of international financial management and exchange rate risk management in particular. It covers all stages of exchange rate risk management in an international company. Analysis of ruble exchange rate volatility and fall in oil prices in the end of 2014 has shown flaws in the system of exchange rate risk management in the Russian companies and has indicated the need for further improvement of hedge strategies and the exchange rate risk management system.
Ключевые слова: обменный курс, валютный риск, девальвация, нефть, российский экспорт, Keywords: exchange rate risk, currency risk, devaluation, oil, Russian export, ruble.
International financial management is a system of economic decision-making process in companies which carry out international economic activity.
Basically, financial management is a set of specific tools that companies use in their financial activities on international markets. Among these tools are planning of financial flows, buying and selling currencies to service various operations, purchasing and selling shares and other securities on the international financial markets, manage its own securities on foreign markets, control currency risk.
International financial management depends on overall system of international finance, part of which are not only other companies, but also states, individuals, international organizations, currencies of different countries.
We can determine causes of uncertainty in international financial management as:
1) Variety of currencies and volatility of exchange rates;
2) Political risks;
3) Variety of economic and legal systems;
4) State regulation of monetary and financial relations;
5) National cultural differences.
In the current era of increasing globalization and currency volatility, changes in exchange rates may have a significant impact on operations and revenues of a company. Competitive position of individual companies, regardless of whether they are engaged in international activities or not, may be affected by changes in exchange rates, various levels of inflation and interest rate fluctuations. Exchange rate volatility is not only a problem of international corporations and big companies, but also of small and medium businesses, which works only in their home country. National differences in banking and trade regulation and level of political stability in
the country of company's activities complicate process of making appropriate decisions.
Undoubtedly, exchange rate risk may significantly impact business and investments. Consequently, risk understanding and managing of exchange rate risk are subjects of obvious importance for business owners and investors. Therefore, in this work we would like to consider issues relating to protection from volatility of exchange rates, as well as examine methods and techniques of international financial management.
Nowadays, financial managers of international companies have to deal with quite specific tasks, which include:
1) Assessment of the situation in the country with regard to its external position;
2) Planning of financial transactions in different currencies;
3) Manage loans and deposits in foreign currencies;
4) Carry out operations on stock and forex markets;
5) Control of foreign direct investments and portfolio investments;
6) Manage export activities according to the previous points.
The main task of financial manager is to assess short-term and long-term financial risks through the prism of time and place and eliminate losses due to changes in foreign exchange rates.
Process of exchange rate risk management in a company consists of several interrelated stages. First of all, risk managers have to determine which type of exchange rate risk affects a company. In accordance with classification from many thematic researches, among the types of exchange rate risk we determine:
2) Translational; and
Journal of Economy and entrepreneurship, Vol. 9, Nom. 5-1
3) Economic risk.
Transactional risk is associated with trading activities, as well as transactions on financial investments and dividend (interest) payments. Transactional risk related to cash flow and level of profit. For example, changes in exchange rate of currency of denomination of any contract lead to a direct losses (profits) for a company. Manager have to pay a lot of attention for this type of risk, as it may lead to unexpected and significant losses because of its short-term character.
Translational risk relates with foreign investments and foreign borrowing, or mainly with accounting representation. It affects performance of balance sheet items when they are converted into a national currency. For example, changes in exchange rates caused changes in consolidated financial statement of international company with subsidiaries. This type of risk has a medium-term character.
Economic risk refers to the future development of market, company and its cash flows. It has a long-term character. Economic risk concerns impact of exchange rate changes on earnings (future domestic sales and exports) and operating expenses (cost of domestic resources and imports). For example, in the case if a currency in which we sell our products will strengthen, our product will have competitive disadvantage on foreign markets because of price in foreign currency.
After determination of the risk type, the next step is selection of methods for assessing exchange rate risk. Mostly, evaluation is carried out by use of the Value at Risk methodology (VaR). The VaR describes a maximum possible size of losses on open foreign currency position of a company for a certain period of time with a given degree of confidence (usually 95 or 99%).
Currency position is a difference between amount of assets and liabilities of a company in foreign currency. If liabilities exceed assets, it is a short open position. If assets exceed liabilities, it is a long open position. When amount of assets and liabilities are equal, foreign currency position is considered closed.
For the VaR calculation we need to have statistical data on quotations of considered currencies (300 quotations and more), current exchange rate, given level of probability, time horizon, and value of open currency position.
For example, today 1000 euro worth 1100 dollars. With a probability of 95 percent we can predict that in a month 1000 euro will rise or fall in price by no more than 150 dollars, i.e. their value will be in the range from 950 to 1250 dollars.
In the recent years, concept of the VaR firmly won recognition in financial world. And not only as a methodology for assessing market risks, but also as a standard of reporting on an overall risk of a company as a whole. Commonality and simplicity of interpretation of the VaR resulted in a rapid introduction of this indicator as a normative standard. Its calculation is based on the methods of mathematical statistics and probability theory, and it is a pretty versatile method. However, it often requires adaptation of the characteristics of the VaR methodology for a particular company.
The third step after a quantitative risk assessment is evaluation of foreign currency positions,
determination of possible financial losses and setting limits of risk. The target is to calculate currency position for each currency which company use in operations. Foreign exchange position can be calculated for a certain date or for the planned future operations.
Open foreign currency position in euro bears a risk on average 4 times more than a comparable position in dollars. And a risk of currency position with a maturity of 12 month about 19 times greater than of a similar position with a maturity of 1 day. The above statements suggest that risk assessment should take into account currency positions and period for which calculation is carried out. Currency risk assessment only on the basis of value of open positions can lead to incorrect strategic decisions. For example, company took a loan of 15 000 euro and shipped to a foreign counterparty goods worth 10 000 euros. Accordingly, company's open long position in foreign currency will be 5000 euros.
After calculating of open currency position, manager sets limit on their size. He also establishes maximum allowable losses. It can be expressed as absolute or relative indicator - for example, as a share of losses on foreign currency fluctuations in the value of company's profits.
The fourth step is risk elimination and exchange rate risk management itself. We are classified methods of exchange rate risk management into internal and external.
Internal methods include purchase of currency in the right amount to cover currency positions, as well as introduction of foreign currency clauses in export and import contracts. Currency clause is a special condition in foreign trade contract to hedge exporter from risk of depreciation of contract nominal currency. There are two main types of currency clause. First of them is establishing amount of transaction in
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