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THE FINANCING DECISION

Quantitative analysis of foreign finance: other important
procedures

• In cases where a business elects not to hedge the

foreign exchange risk (refer to hedging techniques),

or is unable to do so, it is important to perform

additional procedures to explore the effects of risk

and uncertainty. These procedures may include:

• sensitivity analyses, based on changes in the forecast

spot exchange rates

• allocating probabilities to different outcomes such as

“optimistic”, “expected” and “pessimistic” to weigh the

effect of uncertainty on forecast cash flows (refer to

learning unit 10 for more detail on this technique)

• a Monte Carlo simulation (refer to relevant chapter from
your prescribed textbook for more details)

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