An analysis of Competentia's foreign currency exposure and potential strategies

Abstract

The purpose of this thesis is to analyze and to ascertain if our case firm, Competentia, should secure their foreign currency exposure and how they could implement strategies to deal with this exposure. We begin by going through the relevant theoretical background in the field of foreign currency exposure. This will include the three different kinds of currency exposure, transaction exposure, translation exposure and operating exposure as well as the appropriate strategies for dealing with these currency exposures. Furthermore, we will look into absolute and relative parity conditions as well as arbitrage relations before we move into strategy tools like hedging, forward/futures contracts and option contracts. As my research design, I have chosen a causal design with the intention of giving a recommendation of what possible strategies Competentia could use to manage their currency exposure. I have used interviews and accounting data as my main sources of information, which has been used to define the level of currency exposure applicable to Competentia as well as to run scenario analyses and simulations in order to determine the possible ramifications of this exposure on a significant level. The scenario analyses and the simulations revealed that Competentia is indeed exposed to foreign currency fluctuations, especially in GBP, and should with their current risk tolerance level take action to secure at least some of their net exposed GBP position in the light of the projected future forecast of this currency's spot rate against the Norwegian currency, NOK. This will be even more important as the GBP appreciate back to normal levels with respect to the NOK. However, there are both structural (e.g validity and reliability) and empirical limitations (e.g type of analysis and simulations) to this study that needs to be taken into consideration before one concludes with a 100 % certainty. Foreign currency can be hard to measure. Consequently, the above limitations will be discussed in a separate chapter at the end of this thesis.