Good Example Of Economic Risk Analysis- Lowes Corporation Essay
Economic Risk faced by Lowes Corporation
The term economic risk refers to a contingency that the business activity of an entity will be affected by exchange rates, government regulations, political instability, et cetera. As for Lowes Corporation, although the company is headquartered in New York, United States, but it has a diversified range of operations in off-shore countries that expose it to the economic risk. For instance, one of the wholly owned subsidiaries of the company, Diamond Offshore Drilling Inc. exposes the company to the economic risk related to foreign exchange fluctuation. The subsidiary is likely to experience exchange losses when revenue received and expenses paid are in two different non-convertible currencies. Hence, any non-hedged transaction exposes the company to exchange rate risk.
Similarly, other subsidiary of the company, High Mount Exploration and Production LLC, which is involved in exploration of natural gas, also exposes the company to economic risk because of possible changes in the unit prices because of political instabilities and government regulation in oil and natural gas producing countries.
Mitigating economic risk
While no organization can fully control the economic risk, but it can surely hedge its position through derivative instruments such as currency swaps, commodities futures and forwards, et cetera. As for Lowes Corporation, the company declares in the accompanying notes that the primary motive of investment into derivative instruments is to achieve a desired reduction in the economic risk to which it is exposed. Hence, it uses forward contracts, futures, swaps and options to manage the foreign currency and commodity price risk.
Lowes Corporation. (2013). Annual Report 2013. New York: Lowes Corporation .