Managing foreign exchange exposure risk in an operating environment

M.Com. (Business Management)The word "business" is described by the Oxford Dictionary as "one's occupation of affairs, things needing dealing with, buying and selling, trade or a commercial firm" (Swannell P68). The activities ofabusiness are usually carried outwith the primary intention of creating a profit. The objective is to maximise the return on an investment to such an extent that it exceeds the cost of the capital to which the investment relates. This can, however, be a very difficult and intricate process, depending on the nature of the industry concerned, as well as the complexity of the variables affecting the business. Each business has an internal as well as an external environment in which it operates. The internal environment consists of capital, equipment, labour and know-how (Churr and Gous) from which an infrastructure is created. This infrastructure includes an accumulation of raw materials, equipment, funding and personnel. All these are managed and guided by people with entrepreneurial skills in an effortto make the aforementioned acceptable profit. The variables in this internal environment can be managed and controlled to a greaterextent than those of the external environment. One of the variables of the external environment over which individual companies have virtually no control, but which have a significant influence on the profitability of a company, is foreign exchange rates. Although all companies are affected to some extent by exchange rates, those companies involved in international transactions in different currencies are subject to more exposure and consequently a greater foreign exchange risk..