Dissertation Table of Conte TITLE: 1 1. INTRODUCTION 1 1.1 Background of research 1 1.2 Rationale of research 2 1.3 Aims and objectives 3 1.4 Research questions 4 2. LITERATURE REVIEW 4 3. CONCEPTUAL FRAMEWORK 15 4. RESEARCH PARADIGM AND APPROACH 17 5. RESEARCH DESIGN 17 5.1 Research strategy 17 5.2 Research approach 17 5.3 Type of research 18 5.4 Research design 18 5.5 Methods of data collection 19 5.6 Research philosophy 19 5.7 Research ethics 19 5.8 Limitations of research 20 6. POTENTIAL OUTCOME OF RESEARCH 20 6.1 Work Breakdown structure and Gantt Chart 21 REFERENCES 24 Y TITLE: Currency Risk Management in Foreign exchange Figure 1Currency risk Currency is an important medium of exchanging goods and services. In nutshell, currency means money, form of paper or coins which is issued by governing authorities and usually accepted on its face value as a payment mode. In this 21st century, the is another form of currency has been identified or entered in vocabulary that is virtual currency (Miciu?a, 2015). Basically, every nation is having its own currency rate or style which are compared with one another in international market for exchanging various products and services. Interestingly, currency exchanged between countries for different reasons but firms involved in forex market to generate high range of profit level. This complete research is based on currency exchange in foreign marketplace but main focus in on risk aspects because currency of every country is distinct in several terms or value. One of the significant interests of research is risk elements especially associated with currency exchange because various companies are involved in international contracts and encountered the issue of currency fluctuation. There are numerous factors which automatically influence the currency rate due to which its an interesting subject for readers to know the things related to currency exchange risk and how it influences foreign market. It means that currency exchange is consist of various risky situations which is outlined in this research and management strategies too with the help of suitable instances. 1. INTRODUCTION1.1 Background of research Foreign exchange is an indispensable aspect in this competitive environment because it helps corporate firms in a diverse manner like generating a high range of profit level, increasing business presence in a global marketplace, enhancing employees knowledge henceforth. In nutshell, foreign exchange signifies the trading of one currency into another nation such as; swapping the U.S dollar for with euro. This phenomenon takes place in the foreign exchange market which is also denoted as Forex Market where distinct companies come closer for dealing with one another (Aggarwal, Chen and Yur-Austin, 2011). Its not a simple process, but consist of numerous risk which increases the concern of firms and enforce experts to come up with currency risk management practices while entering into a foreign market. Therefore, this overall research will outline various kinds of currency risk and currency risk management techniques that aid an entity in managing several uncertain circumstances. Actually, the risk is inevitable and existing firms are revolving with distinct types of risky situations and when its a matter of global marketplace then the possibility of risk gets double or triple. Thus, this topic of currency risk management of foreign exchange consists of numerous interesting facts and demonstrates the dark side of currency exchange which is always seen as a profitable move by every individual whether he/she is a common man or businessmen. 1.2 Rationale of research In this competitive era, every student or learner, as well as common individual, wants to upgrade about the latest news, tools, techniques, platforms, etc. for coping up with the modern environment. Globalization is one of the trending aspects in the existing era due to which human beings are moving towards the foreign market for different purposes like; traveling for entertainment, enjoying holidays, collaboration with foreign countries, governmental negotiation, and many more (Hassanain, 2015). Apart from this, several kinds of activities are taking place that brings light to currency exchange processing and enforce corporate entities to involve in international exchanges. To some extent, currency exchange is promoted by various national governments and global institutions like the World Health Organization and the International Monetary Fund. These two institutions are playing an eminent role in exchanging currency by managing international funds and activities. For example; WHO is involved in sharing innovative medical services across the globe which instantly increases the demand for currency exchange as developing, developed, and under-developing nations are sharing products or services on a monetary basis (Aggarwal and Harper, 2010). Thus, this complete research is beneficial for readers in understanding the different sides of currency risk by illustrating currency risk management on the basis of identified risk. This overall research is significant for every individual whether its students, professionals, random readers, business leaders, or any other experts in various manner. For instance; learners come to know about the facts of foreign exchange risk, business leaders get upgrade about the possibilities of different risk while currency exchanging, random readers can enhance their knowledge level, and many more. Additionally, students also learn about the different techniques of data collection which helps a researcher in gathering significant information on a certain subject matter. It means that each aspect of this dissertation consists of relevant material that is beneficial for different stakeholders or individuals of society. 1.3 Aims and objectives According to experts knowledge, there is an area or professional office where one can exchange currency with another; its a procedure of reforming currency with another. For example; an issuer of a card or bank can instantly arrange the exchange of currency for supporting firms or individuals (Kanchu and Kumar, 2013). Basically, the foreign market identifies the value of a certain countrys currency rate is known as an exchange rate which is listed in pairs like; USD/CAD, EUR/USD, USD/JPY henceforth. But every firm also needs to aware about a different kind of risk while involving in currency exchange processing due to which this research will investigate various risks and cover mitigation practices. Therefore, the foremost aim of this research is to investigate the currency risk management in foreign exchange by outlining several instances and illustrate diverse risk management practices that aids in mitigating currency exchange risk. To obtain relevant information on the currency exchange rate, a few related objectives are mentioned as follows. To identify the working of foreign exchange?To determine the risks to businesses which trade internationally and who trade in international currencies?To analyse the best practices for managing these risks?To identify the strategy used by companies in this sector for managing and understanding FOREX risks?To determine the most common practices in this sector? The above objectives have covered all the relevant elements of currency exchange risk in context with the foreign market. On the basis of the first objective, a researcher can outline the actual concept of currency exchange incurred in the foreign marketplace with the help of suitable examples. Whereas, the second objective can provide information on the type of risk which might be encountered by corporate firms, leaders, or any individual while involving in currency exchange. After identifying several kinds of risk, research can provide data on risk management strategies that are available on digital platforms and outlined by different previous scholars. According to the last objective, a researcher can throw some lights on one mitigation plan for specific currency exchange risk which can help readers to prefer while applying the process (Menkhoff and et. al., 2016). Actually, the last objective will provide the example of risk management by outlining things according to step-by-step phases that include a correct direction. Thus, the overall research objective can have covered in the literature review section where data of several authors or scholars are outlined with the help of suitable data collection methods. Simply, objectives can classify into several themes for covering necessary aspects of currency risk management practices in foreign exchange. Apart from this, several kinds of activities are taking place that brings light to currency exchange processing and enforce corporate entities to involve in international exchanges. 1.4 Research questions Currency exchange is a common activity in a modern environment due to which research on this subject has become an interesting one and helps in outlining relevant facts on risk. Explain how foreign exchange works?Explain the risks to businesses which trade internationally and who trade in international currencies?Research the best practices for managing these risks?How do companies understand FOREX risks and its management?What are the most common practices in this sector? These above questions are based on designed objectives for further in-depth investigation on currency risk so that researcher or reader come to know about the technique of managing uncertain circumstances. Though objectives are formed but questions can direct researcher towards right path in order to accumulate relevant information on complex terms. 2. LITERATURE REVIEWTheme 1: Working of forex exchange market. In these developing countries, every nation is having different form of currency, government and economic factors which automatically create differences between currency rates. For example; dollar is enjoying highest rate in global currencies as compared to other nations because of several factors. In fact, few companies involved with U.S for gaining excessive range of profit level especially those entities whose currency rate are minimum than currency (King, Osler and Rime, 2011). A little bit glimpse of foreign exchange market is shown as follows to conduct further investigation on it that how challenging it is. Figure 2Top risk management strategies in forex trading (Source: Anzél Killian, 2021) As per the reviewed article of Gordon Scott, (2020) foreign exchange market or currency market is an over-the-counter (OTC) international marketplace that identifies the exchange rate for currencies over the globe. Foreign exchange markets are formed by banks, forex dealers, commercial entities, central banks, investment managerial business, hedging funds, retail dealers, and investors. Its an original financial market that formed to fetch structure to the growing world economy. On the basis of trading value, the forex market is always considered the largest financial market over the globe. Instead of purchasing, selling, exchanging, and currency speculation, the foreign market also permits currency conversion for global trade settlements and investments (Rampini, Viswanathan and Vuillemey, 2020). Bank of International Settlements, owned by central banks claims that foreign exchange trading is having an average amount of nearly $6.6 trillion in a single day in 2019 April. According to the rule of a foreign market, currencies are majorly traded in pair form so that the value of one of the pair currencies is relative to the value of the other. It identifies how much of A countrys currency can purchase country B one or vice versa. In fact, setting a relationship per price for international markets is the foremost function of the forex market. It greatly improves the liquidity in every financial market which is a key element in overall stability. Figure 3Foreign Exchange Risk (Source: SOMER ANDERSON, 2020) The value of a national currency is enormously dependent upon float that whether its a free float or fixed float. Free-floating currencies are considered as those ones whose comparative value is identified via free-market elements like supply-demand relationships. Whereas, a fixed float is possible when governing bodies of a nation have set the comparative value of currencies with another one by pegging it on certain standards. Some of the popular examples of free-floating currencies incorporate the U.S dollar, Japanese yen, and British Pound whereas countries that followed the fixed floating include the Chinese Yuan and Indian Rupee. A researcher has identified that one of the exclusive features of the forex market is that it consists of an international network of financial centers that transact 24 hours a day. The topmost liquid trading pairs are located in descending order of liquidity such as; EUR/USD, USD/JPY, and GBP/USD (Bauerschmidt and et. al., 2010). There are distinct key factors that differentiate the foreign exchange market from another one like the stock market are mentioned below. In fact, few companies involved with U.S for gaining excessive range of profit level especially those entities whose currency rate are minimum than currency (King, Osler and Rime, 2011). A little bit glimpse of foreign exchange market is shown as follows to conduct further investigation on it that how challenging In the forex market, fewer rules are set which signifies that investors are not abode by strict standards or regulations. There is also an absence of clearinghouses and central bodies that oversee the foreign exchange market. In fact, there are numerous investors who dont need to pay any traditional fees or commissions but sometimes it becomes essential in other markets. Forex market is open 24 hours a day due to which trading at any time is possible that indicates that there is an absence of cut-off time for participating in a market (Hendrawan, 2017). When its a matter of risk and reward then traders can get in or out as per own wish as well as purchase maximum currency for increasing accounting balance. Euromoneys 2018 FX survey illustrates that there are ten biggest players in the foreign exchange market who might encounter currency risk are shown as follows. BankMarket shareJP Morgan Chase12.13%UBS8.25%XTX Markets7.36%Bank of America Merril Lynch6.20%HSBC5.58%Goldman Sachs5.53%Standard Chartered4.49%State Street4.37% This above table denotes that overall world is involved in currency exchange activities for distinct reasons like generating high range of profit level, increasing its presence in foreign market, expanding business and many more. Theme 2: Risks to businesses which trade internationally and who trade in international currencies. Currency exchange comprises the trading of currency pairs. According to Oh and et. al., (2012) foreign exchange risks signify the losses which are identified in global financial transactions because of fluctuations in currency. Risk in currency exchange also influence investors, who had traded in global markets as well as corporate firms who are involved in import or export activities to multiple nations. For example; an increase in currencies is linked with a low debt-to-gross product ratio. The Swiss Franc is an appropriate example of a currency that is probable to remain well-supported because of the nations stable political system and low debt-to-GDP ratio. In nutshell, foreign exchange exposure signifies the risk which an entity faces while conducting financial transactions during foreign currencies. Every currency experience different periods of high volatility which can unpleasantly influence profit margins especially when strategies are not appropriately applied for preventing cash flow from instant currency fluctuations. There are different kind of currency risk which has been incurred in currency or foreign marketplace that is demonstrated as follows. Exchange Rate Risk is a topmost uncertain circumstance which is caused due to the reformation in currency value. It completely depends upon the effect of continuous and usually unstable shifts in globa
l supply & demand balance. This risk is pretty substantial and depends upon a market perception that on which ways currencies will move on the basis of certain elements incurred at any time or anywhere across the globe. The forex market fluctuates due to fundamental and technical elements. There are mainly three diverse kinds of Foreign exchange risk such as; Transaction risk, Economic risk, and Translation risk (Liovi? and Novakovi?, 2016). Figure 4FOREIGN EXCHANGE RISK (Source: Foreign Exchange Risk, 2016) This diagram clearly signifies that the financial world is full of risks which get fluctuate due to the differences in various other factors like instability of the political system, changing in economic conditions, the emergence of multinational enterprises, etc. The above flowchart is a sign of fluctuation and changes in the currency market which is a key reason behind risky situations. Transaction risk is the uncertain circumstance that is encountered by an organization while completing financial transactions between jurisdictions. Fundamentally, delaying in time between transaction and settlement is a basis of transaction risk. It can only get mitigate with the use of forwarding contracts and options. For instance; a Canadian firm is involved with China firm for operational activities and looking for transferring CNY600 as an income in its Canadian account. In this case, the exchange rate at the transactions phase was almost 1 CAD for 6 CNY but if the rate subsequently falls down to 1 CAD for 7 CNY before settlement (Fanelli and Straub, 2020). Economic risk is also considered as forecast risk, this risk is that when the market value of a firm gets influenced by unavoidable exposure to exchange rate fluctuations. These kinds of risk are emerging because of macroeconomic conditions like geopolitical instability or governmental regulations. For example; Canadian organization is selling locally then face economic risk from furniture importers especially when the Currency of Canada unpredictably strengthens. Translation risk is also named as translation exposure. This risk is faced by headquartered branches domestically who are performing business activities in a foreign jurisdiction and the financial performance of a firm is signified by its domestic currency. Translation risk gets increased when an entity holds the highest portion of business assets, liability, and equities in foreign currency (Badshah and Borgersen, 2020). Apart from foreign exchange risk, few other risks which also influence currency exchange include; interest rate risk, credit risk, replacement, settlement, counterparty default risk, country & liquidity, leverage, and risk of ruin. Interest rate risk indicates the profit & loss which is generated due to the fluctuations in forwarding spreads incorporating mismatching of forwarding amount and maturity gaps in transactions of foreign exchange book. On the other hand, replacement risk incurred when counter-parties of a failed bank or foreign broker identifies that they are at risk of not obtaining their funds. Whereas, the possibility of settlement risk identified when there is a difference in time zones on diverse continents because currencies are exchanged at different prices at a different time on the same trading day. For example; Australian and New Zealand Dollars are credited first, after then Japanese Yen, followed by European Currencies and it ends with US Dollar (Ahmad, Rhee and Wong, 2012). It completely depends upon the effect of continuous and usually unstable shifts in global supply & demand balance. This risk is pretty substantial and depends upon a market perception that on which ways currencies will move on the basis of certain elements incurred at any time or anywhere across the globe Theme 3: Understanding risk in FOREX market and its management. For understanding risk in forex market, companies always analyse different range factors which influences the market. Basically, factors play an eminent role in generating risky situations in foreign exchange market such as, gaining an understanding on political relations is a key element to know about the fluctuations in market etc. Therefore, corporate firms always consider diverse factors for understanding risk in forex market and sometime avoid to manage it an appropriate way. Some of the essential factors which needs to understand by leaders or businesses to analyse forex risk are demonstrated further in detail manner. As per the perspective of Kisaka and Mwasaru, (2012) there are three foremost reasons which affect the foreign exchange rate. The first one, which is the most common one in the forex market is fundamental. It means that if the UK economy reinforces but the EU weakens then the Pound value which would generally rise against the EUR value. There is also a phenomenon of expectations versus reality. For example; positive news comes from the UK and still Pound is losing value. The main reason behind this is that market is expecting the highest positive result, even though the outcome in itself was positive. For instance; unemployment rates were published by the UK and it indicates the fall of unemployment. In this highly liquid and transparent forex market, expectations are also considered as factored or priced in FX Rate before the final results get published in the marketplace. Thus, when there is a difference between expectations outcomes from real ones then the trader expects an adjustment in currency rate respectively (Klement and Longchamp, 2010). Speculation is another way that influences the currency rates. Speculators are those individuals who get involved in bets that rate will either go or might get down. These kinds of bets might sometimes get aggressive which might influence the rate itself and formed an influence that results in an increase of speculators betting in a similar direction. In a real sense, the forex market is a large one that trades nearly US$5 Trillion in a single day. Therefore, its genuinely impossible for one broker or speculator to influence the market on their own but sometimes combined effort influences also. To some extent, it becomes a case of self-fulfilling prophecy like when traders of the market believe that rate is going down when it will hit specific rate level then every seller or buyer make bets on the basis of expectations. This complete scenario creates a case of self-fulfilling prophecy which reform the market accordingly. It means that speculation generally influences the market for the short-term but fundamentals are one that affects the market for the long-run (Wei and et. al., 2013). The third way which influences the foreign currency rate is due to the involvement of the government. It means government intervention but this involvement is rare as it might create trust issues whenever take place and other economic effects that might not be desirable. A specific government might use monetary policy for controlling the value of the national currency but this is only possible when the only currency of a single country is involved in it. For instance; it is completely challenging to observe governmental intervention from the EU towards EURO because its important for every nation to support that decision. The above examples or ways have shown that there are several factors which are having the potentiality to continuously influence the fluctuation of currency exchange risk. Therefore, it is indispensable for traders to consider every internal or external aspect while getting involved in a foreign market. This aids in overcoming the probabilities of heavy losses (Pontines and Rajan, 2011). Theme 3: Best practices for managing these risks. Figure 5How to hedge currency risk The above flow chart is a simple mode of mitigating or managing currency risk and follows certain steps; conducting research, practicing hedging strategy, and starting hedging strategy. Anzel Killian, (2021) forex risk management permits traders to implement a bunch of rules and measures to make sure that negative influence can easily get managed. An appropriate strategy requisite proper planning for the outset as well as a risk management plan for resolving the problem in a better manner (Edens, 2010). There is a certain plan which helps the trader in managing risk in forex trading by following specific paths or activities that are demonstrated as follows. Currency Risk management strategies Understanding the forex market As per the expertise data, the foreign market is formed by different currencies across the globe like GBP, USD, JPY, AUD, CHF, and ZAR, which is also denoted as foreign exchange, initially driven by elements of supply & demand. In this trading, traders are purchasing one asset with the use of a specific currency, and market price clarifies how many buyers have to spend for purchasing another one. A foremost currency that appears in the forex pair quotation is known as a base currency and the second one is considered as the quote currency. The price which is shown on the chart is considered as quote currency or represents the amount of quote currency that needs to spend by the buyer for buying one unit of the base currency. For instance; 1.25000 is GBP/USD currency exchange rate then it means that the purchaser has to spend almost $1.25 for buying nearly Euro 1. By understanding the forex market, it is understood that there are three distinct kinds of forex markets such as; spot market, forward and futures market (Busch, Christensen and Nielsen, 2011).Get a grasp on leverage Whenever firm involved in speculating on forex price movements with spread of bets or CFDs then it is trading on leverage. It permits business to get involved in full market exposure from small initial deposit which is known as margin. Trading on leverage is beneficial and there is also probability of downsides like chances of magnified losses (Bartram, Burns and Helwege, 2013). Therefore, it is indispensable for traders to consider every internal or external aspect while getting involved in a foreign market. This aids in overcoming the probabilities of heavy lossesBuilding an effective trading plan An outstanding trading plan aids trader of foreign exchange to make things easy by performing the role of personal decision-making tool. It aids in maintaining discipline in volatile foreign market. Main purpose of plan is to answer the significant questions like what, when, why and how much need to trade. It is genuinely essential for trading plan to be personal instead of coping other plan because every trader is having distinct objectives, attitudes and ideas. Additionally, trader can also use trading diary because it is another tool which is used for keeping the record of everything, whatever incurred while exchanging currency from entry to exit (Toma and Alexa, 2012).Set a risk-reward ration Figure 6Set a risk-reward ratio In trading activities, it is essential that risk on capital must worthwhile. Preferably, profit of trader needs to outweigh the losses and make money for long run even if one is losing on individual trades. According to forex trading plan, one has to set risk-reward ratio for quantifying the worth of a trade. To identify the ratio, trader have to compare the money amount which one is risking on FX trade to obtain maximum gain. For instance; if high range of loss is on trade that is nearly 200 euro and highest gain is euro 600, then in this situation risk-reward ratio is almost 1:3.Use stops and limits Its very significant to decide on entry and exit points of trading before opening a position because forex market is specifically volatile. This can possible via different stops and limits such as; Normal stops can close position of trade automatically if market can go against trader because there is absence of guaranteeing against slippage. Guaranteed stops always closed out at exactly specified price for eradicating the uncertain of slippage. Trailing stops consider the positive price movements and close the position if marketing is moving against trader.Managing emotions Volatility of foreign market also wreak havoc on emotions and if one key element influences the growth of trade then its trader itself. There are several emotions which either motivate trader to further trading or to cloud the judgment like fear, greed, temptation, doubting and anxiety.Keeping eye on news and events Trader can also make assumptions on price fluctuations of currency pairs which is highly challenging because there are distinct factors which influence the market and become a reason behind market fluctuations. Therefore, it is essential to keep eye on central bank decision, announcements, political information and market sentiments (Dafikpaku, Eng and Mcmi, 2011).Starting with demo account Main objective of demo account is to re-form the experience of real trading as much as close because it aids trader in understanding the working of forex market. Thus, main difference between demo and live account is that trader will not lose real money in demo account and one can easily enhance trading confidence in risky environment too. These above management strategies can appropriately manage the different type of risk which are identified in forex market while exchanging currency with distinct traders. According to above mitigation plan, traders can easily control the probabilities of future danger which is shown in matrix form. ComparisonNegligibleMinorModerateSignificantSevereVery likelyLow mediumMediumLowLowLowLikelyModerateMediumMediumLowLowPossibleHighModerateMediumMediumMediumUnlikelyHighHighModerateModerateMediumVery unlikelyHighHighHighModerateMedium This above matrix indicates that risk management strategy which is outline in this research is effective and beneficial for traders who are involved in various foreign exchange activities. 3. CONCEPTUAL FRAMEWORK Foreign market is a foremost concept of this overall research because currency exchanging is incurred in international financial institutions. Global marketplace is consisting of various information where lots of activities or things are exchanged like labour, tangible or intangible products, services, currencies etc. But main concept of this research is currency and related terms are risk or management strategies. Through this research, it is analysed that firms which are involved in exchanging currencies in international financial transactions are facing distinct kind of risks. In fact, global market is suffering from various uncertain situations due to which traders have to come up with useful managerial strategies for overcoming the possibilities of heavy losses (Tuohy and et. al., 2012). A complete description of conceptual framework for this research is shown as follows. Currency exchanging Currency risk Free-float & Fixed Float Foreign Exchange Market Exchange Rate Traders, Investors & members Risk Management strategies This above description or classification of concepts indicates that overall research revolves around foreign exchange market where number of activities had taken place. Therefore, experts have to involve in numerous planning process and tasks for overcoming the probabilities of loss. 4. RESEARCH PARADIGM AND APPROACH This complete research is based on interpretivism paradigm which signifies the philosophy that help researcher in gathering relevant information on certain subject like main objective is to address the risk management techniques. According to interpretivism paradigm, researcher use small samples by conducting some in-depth investigation with the help of qualitative tool. On the other hand, inductive approach is suitable one which aids researcher to follow specific path that begins with setting of aim, designing objectives and questions for completing the overall research. Inductive framework outlines the path for researcher in order to minimize the possibilities of misdirection in gathering data (Zangirolami-Raimundo, Echeimberg and Leone, 2018). 5. RESEARCH DESIGN5.1 Research strategy Research strategy is complete plan for conducting investigation study. It direct researcher in various process like planning, implementing and monitoring of study. There are sev