Foreign Exchange Risk Control in the Context of Supply Chain Management

Park,, K. (2015). Foreign Exchange Risk Control in the Context of Supply Chain Management. The Journal of Distribution Science, 13(2), 15-24, https://doi.org/https://doi.org/10.15722/jds.13.2.201502.15

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Abstract

Purpose - Foreign exchange risk control is in an important component in the international supply chain management. This study shows the importance of the reference period in forecasting future exchange rates with a specific illustration of KIKO currency option contracts, and suggests feasible preventive measures. Research design, data, and methodology - Using monthly Won-Dollar exchange rate data for January 1995~July 2007, I evaluate the statistical characteristics of the exchange rate for two sub-periods; 1) a shorter period after the East Asian financial crisis and 2) a longer period including the financial crisis. The key instrument of analysis is the basic normal distribution theory. Results - The difference in the reference period could lead to an unexpected development in contract implementation and a consequent financial loss. We may avoid foreign exchange loss by using derivatives such as forwards or currency options. Conclusions - We should consider not only level values but also the volatilities of financial variables in making a binding financial contract. Appropriate measures may differ depending on the specific supply chain pattern. We may extend the study with surveys on actual risk measures.

keywords: Supply Chain, KIKO, Volatility, Foreign Exchange Risk, Forward/Options

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Article Contents

Vol.13 No.2

Foreign Exchange Risk Control in the Context of Supply Chain Management

Abstract

Reference

The Journal of Distribution Science