FedEx Exchange Risk the Majority of Fedex's Essay

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FedEx Exchange Risk

The majority of FedEx's transactions are in the U.S. dollar, but foreign exchange currency risk exists with the British Pound, Canadian dollar, Chinese Yuan, euro, Hong King Dollar, and the Japanese yen. During 2012 and 2011, foreign currency fluctuations positively impacted the operating income. At May 31, 2012, a uniform 10% strengthening in the value of the dollar relative to currencies in which transactions were denominated would result in a decrease in operating income of $75 million in 2013 (FedEx Annual Report 2012, 2012). This assumes each exchange rate changes in the same direction relative to the U.S. dollar.

Some of the foreign currencies are stronger than the dollar, creating more profits, and some of the currencies are weaker than the dollar, creating losses in revenues. If the overall currency mix is stronger than the dollar, there will be additional revenues. If the overall currency mix is weaker than the dollar, or the dollar strengthens causing more weakness in other currencies, then there can be loss of revenue. Where the dollar strengthened with a uniform 10% increase, it would show more weakening in other currencies and create a loss of revenue.

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In some respects, the different foreign exchange currencies can hedge against each other because some are stronger than the dollar and some are weaker. But the overall value of all the foreign exchange rate values would determine whether the company would make profits, break even with the U.S. dollar, or create losses.

Two main ways investors judge a firm's value is profitability and cash flow, which are important reasons to limit a firm's exposure to changes in exchange rates (Volkov). Managers use forward contracts, options, and money market transactions to hedge potential foreign exchange risk. Forward Contracts are agreements between two private parties to make an agreed upon rate sometime in the future, at an agreed upon time. They eliminate exchange rate risk and any additional profits that can be earned with favorable movement in exchange rates. With the forward contract, the manager would know upfront what the revenue would be from the contract because it….....

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