Question

The following question is based on the company Amazon.

-Identify any applicable governmental involvement in managing trade or exchange rates that the MNC must take into account in managing its exchange rate risk. Look at the actions and policies of the MNC’s home government (i.e., the US) as well as foreign governments if applicable.

-Document as precisely as possible the MNC’s strategy for managing exchange rate risk. How could the firm use currency derivatives or other approaches to hedge against the exchange rate risk?

Answer 1

1. In case of US Govt., the department of treasury and the Federal Reserve can do occasional intervention to control the FX market (in case it goes out of hand).

a. If the price of US dollar goes up, they typically will sell dollar. If price of US dollar goes down, it will buy dollar

b. The foreign currencies that are used to intervene usually come equally from Federal Reserve holdings and the Exchange Stabilization Fund of the Treasury. These holdings currently consist of euros and Japanese yen. Interventions may be coordinated with other central banks, especially with the central bank of the country whose currency is being used.

In case the country has a non deliverable currency (Taiwan/ India), they central bank of that country have to take specific measure to contain the FX data volatility.

2. Currency derivative can be used to mitigate the exchange rate risk. Also, the MNC can keeps on buying or selling specific currencies to manage its exposure against that currency. If MNC is operating from the country like India/ Taiwan and trading in local currency (TWD/ INR), they can trade in NDF (non-deliverable forward) to mitigate the exchange impact of local currencies.