Abstract
M.Com. (Business Management)
After years of international isolation, South Africa has been re-admitted to the
international fold. For the country's business community this entails new
opportunities, as well as threats. International markets and finance opened up during
the past year. It also led to South Africa signing the latest GAIT agreement. This
will, enable foreign exporters to have access to the local market in the future, it will
also encourage competition amongst local companies that previously mainly
produced for domestic consumption. New markets will have to be exploited.
These new opportunities and threats create new risks for companies entering these
new markets. An important component of these new risks is the volatility in the
foreign exchange market. Import and export companies receive and make payments
in foreign. currencies. Unexpected movements in exchange rates can influence a
company's profitability and competitiveness.
Due to the size of the foreign exchange market, it is the most liquid and volatile
market in the world. To minimise the risk and seize opportunities in adverse foreign
exchange movements, currency exposure must be managed properly. Although
integrated treasury management proves to be a successful approach in most
industrial countries, it is a relatively new science, in South Africa.
A large number of financial instruments exist for the hedging of foreign currency
exposure. In South Africa' these options are limited, due to exchange. control
regulations and this also hampers the number of hedging possibilities.
Under different market conditions different hedging strategies and instruments can
provide different results. There is one guarantee that a given instrument or strategy
will result in the optimal hedge. It might even result in more inherent risks. Risk
management is a dynamic activity within an organisation and calls for educated
decisions to minimise risk and utilise opportunities.