London 2012 Olympic Games affect British foreign exchange? And how to manage currency-related risks?

As the world of business becomes increasingly global, more and more companies are establishing themselves as multinational corporations. They attempts to introduce new products and services, and a combination of different strategies in order to maintain profitability and competitive advantage in foreign markets, that will face a variety of challenges.One such challenge faced by throughout their dealing in foreign markets is fluctuations in currency exchange rates.

The currency risk is one of the treasury risks that affect almost all companies in one form or another. According to Arnold (2008) addressed that are three type of risk for firms which operate in an international marketplace, these include transaction risk, translation risk and economic risk. Arnold (2008) also emphasized that, the foreign exchange market is mainly concentrated in the import and export, tourism, government and bank.

However, predict future trends in major currency exchange rate movements, each foreign trade enterprises of the most important one under the floating exchange rate system work. However, due to many factors that affects the exchange rate movements, not just by the impact of the economic power and political conditions of the monetary authorities, and sometimes even a temporary government measures sufficient to affect the exchange rate movements?

There are examples from BBC news (2011) shows the Olympic Games hopes to create a £1bn boost for businesses and bring in four million extra foreign tourists. And that will bring in the business and tourists from now and beyond 2012. It's the latest wave of GREAT - Britain's biggest ever tourism campaign - which is costing the UK government £125m and aims to attract 4.6 million more visitors, £2.3bn in additional visitor-spend, and £1bn of extra investment over the next four years (Hirst, 2012). Although the Olympic Games can bring many benefits to the state, just as there are a lot of people around the world will come to Britain, which not only to promote British tourism development, but also bring unlimited business opportunities. In the same time, Hirst (2012) also consider some questions, that London 2012: Will GB reap ‘great’ tourism rewards? A multi-million pound international campaign has been launched to entice visitors to the UK. But with the Olympic Games expected to draw the attention of four billion global viewers, is this marketing push money well spent?

As result, Blake (2005) pointed out the Olympics has not always brought financial reward. The 1972 Munich Olympics made loss of £178 million, 1976 Montreal Olympics also made loss of £692 million. The 1984 Los Angeles Olympics and the 1992 Barcelona Olympics made surpluses of £215 million and £2 million. According to this result, it can draw a conclusion of this failure must be to the foreign exchange management are closely linked. Then UK 2012 faced with this tremendous business opportunities brought to the country simultaneously, the government is how to formulate a strategy to properly manage foreign exchange risk?

In addition, the currency risk has been shown to be particularly significant and particularly damaging for very large, one-off investment projects, so-called megaprojects. This is because such projects are typically financed by very large debts nominated in currencies different from the currency of the home country of the owner of the debt. Megaprojects have been shown to be prone to end up in what has been called the "debt trap," for example, a situation as due to cost overruns, schedule delays, unforeseen foreign currency and interest rate increases. And the costs of servicing debt become larger than the revenues available to do so. Financial restructuring is typically the consequence and is common for megaprojects.

At present, the currency fluctuations are a global phenomenon, and can affect multinational companies directly through their cash flow, financial result and company valuation. The exposure to currency risks might however be covered against or ‘hedged’, as it is called, by different external and internal corporate strategies. To reduce their exchange rate risk exposures, international firms actively utilize hedging instruments such as futures, options, and swaps (Broll et al, 2009). Corporations can hedge foreign exchange risks with diversification and derivatives. In addition, beyond diversification, currency derivatives manage foreign exchange risks. Currency derivatives, such as futures, options and forwards, lock in predetermined exchange rates over set periods of time.

Supplementary video: What do you feel are the long term benefits of London hosting the 2012 Olympic Games? ‎Available at: http://youtu.be/xi8l1uli9nY (Assessed 25 Feb 2012)