1.

Identify the possible exchange rate risk;

Foreign exchange risk can also be named as currency risk or FX risk that refers to the
losses that incur due to currency fluctuations. Stakeholders might be at risk from sovereignty
in the context of foreign exchange threat.
Understanding Foreign Exchange Risk
The danger of foreign exchange occurs whenever a business makes financial transactions
with such a collateralized firm.
Foreign exchange risks are of three types:
 Transaction risk: A company faces this kind of risk when it buys product from
foreign country. In the foreign currency the product price will be dominant. The
buying company has to make a larger if the foreign country appreciates against the
buying currency.
 Translation risk: When a subsidiary’s financial statements are translated back to
currency of the parent company, then a parent company having a subsidiary in abroad
could incur loss.
 Economic risk: Economic risk, referred to whenever an inevitable exposure to
currency volatility continuously impacts the stock valuation of a product.
Effect of Coronavirus on exchange rate risk
Also global currency industry is suffering the consequences of increasing fears regarding
coronavirus. Over the last two years, several global currencies have plummeted and we have
also witnessed financial markets hit their lowest rates following the 2008 crisis.

The US Dollar rises and falls

The coronavirus initially had a negative effect on dollar, with either the currency going up
about falling. The Federal Reserve, though, made a move to cut interest rates that led the
Dollar to decline dramatically. In this pandemic, however, the dollar might suffer another
major dive. As the scenario progresses we will see the financial markets are failing to
recover.

Fall of Singapore dollar

The Singapore dollar dropped by about 0.8 per cent against the U.S. dollar, the highest
regular drop in around two years of SGD. Singapore cautioned that the outbreak would affect
progress, even as its economy displayed signs of recovery from the lowest development in a
decade last year.

The city-state confirmed 24 cases of new coronavirus, while China's coronavirus death count
initially reached 500.

In spite of both the economic effects of coronavirus epidemic, the exchange rate is lower.
Singapore conducts strategy by exchange rate arrangements, rather than interest rates like
other banks do, enabling the Singapore dollar to grow or fall within an unknown monetary
range against the currencies of its major trading partners..
2. To demonstrate above exchange rate risk exposure incurred by the outbreak,
please provide a forecast in ONE foreign exchange rate (FX) incurred in
exposure on 18, 19 and 20 May 2020, respectively.

Answer:
During the outbreak of COVID19, a review of foreign exchange risk management of the
clients who are listed in the stock exchange of the Singapore. The following working are
derived on the figures based on the MNC listed in the Singapore stock exchange. The details
are as follows;

Forecast ONE exchange rate 18, 19 and 20 May 2020

Using PPP, IRP and IFE
 Purchase Power Parity
The purchasing power parity (PPP) is one macroeconomic analysis metric for comparing
economic growth and living standards across countries. PPP is an economic principle that
contrasts currencies of various countries by means of a "goods set" method.
 Interest Rate Parity
IRP is a principle where the interest rate disparity between two nations is equivalent to the
gap among forward rate of trade and the spot rate. Price parity plays an important role in
international currency markets, linking interest rates, spot currencies and foreign exchange
levels.
 International Fisher Effect
IFE is an empirical hypothesis that anticipated differential between two currencies' exchange
rates is essentially equivalent to the gap between the nominal interest rates of their countries.
Purchase Power Parity
Cost of Goods X ∈Currency 1
Fo=
Cost of Goods X ∈Currency 2

SGD/USD 18-05-2020 19-05-2020 20-05-2020

Wheat Price US 204.3668 204.4347 204.3499
Wheat Price SGD 239.3293 242.3165 240.3165
Forward Exchange Rate 0.8539 0.8437 0.8503

Current Price
SGD 296.16
USD 209.07

Assumption SGD USD

18-05-2020 239.3293 204.3668
19-05-2020 242.3165 204.4347
20-05-2020 240.3165 204.3499

Interest Rate Parity

(1+i c )
Fo=So
(1+i b)

18-05-2020 19-05-2020 20-05-2020

Spot Rate SGD/USD 0.71 0.71 0.71
Interest rate In USA 1.0041 1.004205 1.004194
Interest rate In Singapore 2.2121 2.2125 2.2116
Forward Exchange Rate 0.8577 0.8579 0.8573

Further, it is assumed that inflation will reduce up to 0.4% in Singapore While it is expected
that inflation will reduce up 2.1%. So prices are forecasted on the estimated basis in the
absence of the actual data. Interest rate is expected to be 1.20% by the end of this quarter so
there are some basis point will be change in 18, 19 and 20 May.
The above rate is on the 12 month fixed deposit

SIBOR 12 Month 1.22%

18-05-2020 1.2121
19-05-2020 1.2125
20-05-2020 1.2116

LIBOR 12 Month 0.69%

18-05-2020 0.0041
19-05-2020 0.0042
20-05-2020 0.0042

International Fisher Effect

(1+ Nominal Interest Rate)
−1
(1+ Inflation)

SGD Nominal Interest Rate Inflation

18-05-2020 1.2121 1.0593
19-05-2020 1.2125 1.0598
20-05-2020 1.2116 1.0599

(1+ i) (1 + n) % Change in Ex Spot Rate SGD/USD

2.2121 2.0593 0.0742 0.7100 0.7842 / $1
2.2125 2.0598 0.0741 0.7100 0.7841 / $1
2.2116 2.0599 0.0736 0.7100
0.7836 / $1

3. Comment on how the MNC could manage the corresponding risk based on (1)
and (2).
A currency's value varies based on different market influences, including inflation, interest
rates, account balances, terms of exchange, political and economic success etc. which
influences companies and people involved in foreign transactions. Economic risk
comes from market shift of one currency over another. Any time shareholders or companies
face foreign exchange risk. This vulnerability failed to guarantee cash flows, unsystematic
uncertainties, foreign funding, financial uncertainty, property of shareholders.

Foreign exchange risk management techniques are;

 Risk Sharing: Seller and buyer deciding share the currency risk to sustain the long-
term partnership dependent on the nature of the goods and the efficiency of the
supplier. In the event that the buyer (or seller) can direct terms and sees there is little
danger of their margin being influenced by money change, they might be less ready to
share the hazard.

 Diversification: 
Diversification is a tool for managing the risk that allow building a portfolio of different
investment. The theory behind this method is based on the different kind of investment on
average and high returns as well as low return. However, investors or MNCs do so with their
money in more than one currency.

 Natural hedging: 
A risk management strategy in order to mitigate the risk is a natural hedging, in which
management to manage the risk by investing in those assets that are negatively correlated.
This can be implemented when management exploit their operating procedures, for example,
they cause costs in the same currency that leads to the generation of income where the
exchange rate risk is low.

 Cross Hedging: Cross hedging is also used to convert more than one currency, for
example if an importer accepting payment in Chinese Yuan cannot be translated
directly to INR such that it is translated to USD first and then INR.

Foreign currency:
 Denominated debt: A Trade will allow use of the loan in two currencies. Home-
currency loan with exchange-rate danger and other loans in foreign currency free of
exchange-rate threat
 Money market Hedge: A money market hedger is a method used to secure and lock
the value of foreign exchange in an organization's home currency. Subsequently, a
 money market hedger can enable a household organization to decrease its risk or
when directing business exchanges with foreign organization in the financial market,
which are liquid like Treasury bills, bankers acceptances, and commercial papers are
used to trade. .

Currency Swaps: 

It is a consent to exchange between two parties to fixed or floating interest rate financing in a
one currency for fixed or floating interest rate in a second. It additionally give a client to re-
denominate financing starting with one currency then onto the next.

.
MNC will control the exposure using the aforementioned methods; use the correct strategy at
the right moment. MNC's should handle foreign risk includes daily foreign market tracking
and lots of flexibility. This could help balance and raising the cost of foreign exchange.