Exchange Rate One of the Risks That Essay

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Exchange Rate

One of the risks that I face in this particular scenario is that by the time September rolls around and I receive the funds from the Swedish government the exchange rate will likely change. If the exchange rate goes against me, for example goes to 11 SKr/$, I would face a shortage of approximately 10%. An even higher risk would be if the exchange rate goes even higher. Research on the fluctuation rate provides me with data that assists me in my dilemma.

According to www.x-rates.com the exchange rate of the Swedish krona to the American dollar

during a recent three-month period has fluctuated approximately six percent with a high of and a low of 6.299. If this rate of fluctuation continues to hold true I face a risk of a six percent rise or decline in the value of the kroner when I receive the funds.

Since the current rate of exchange is 10 to 1, if the rate were to drop by six percent over the next three months my kronas would then be worth $10,560.

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I would have an extra $560

to splurge on pizza and other American foods! However, if the exchange rate goes up by six percent during that same period of time my 10,000 kronas are then worth approximately

$9,440. Drat! Now I have to starve for the last month of my first year attending American college. So, I'm faced with a conundrum, do I hedge my bet by buying or selling currency options?

Solving the conundrum probably depends on the going rate of the option contracts and how much of a commission I would have to pay a broker to facilitate the transaction. It also depends on how conservative or aggressive a person I am. If I don't mind taking a little risk in life then I do not hedge my risk at all and allow the market to determine what I ultimately end up with in the way of dollars. However, if….....

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