**Case Study: Financial Risk Management**

*Introduction:* XYZ Corporation, a global player in the manufacturing industry, recognizes the significance of financial risk management in maintaining stability and ensuring sustained growth. The company operates in diverse markets, facing various financial risks that demand strategic approaches to mitigate potential adverse impacts.

**Step 1: Identification of Financial Risks**

- **Foreign Exchange Risk:** XYZ is exposed to fluctuations in currency exchange rates due to its international operations. The company identifies this risk as a potential threat to its profitability, given the impact of currency movements on export and import costs.

- **Interest Rate Risk:** With varying interest rates in different regions, XYZ assesses the exposure to interest rate fluctuations. This is crucial, especially when the company has substantial borrowings subject to floating interest rates, making it vulnerable to changes in market rates.

**Step 2: Risk Assessment and Quantification**

- **Quantifying Foreign Exchange Exposure:** XYZ employs financial modeling and scenario analysis to quantify its foreign exchange exposure. This involves assessing the potential impact of currency movements on cash flows, identifying hedging opportunities, and implementing strategies to mitigate risks.

- **Interest Rate Sensitivity Analysis:** Conducting sensitivity analysis, XYZ evaluates how changes in interest rates can affect its financial performance. The company quantifies the potential impact on interest expenses and implements strategies such as interest rate swaps to manage and hedge against interest rate risks.

**Step 3: Implementation of Risk Mitigation Strategies**

- **Currency Hedging:** To manage foreign exchange risk, XYZ adopts currency hedging strategies such as forward contracts and options. These instruments provide a level of certainty in cash flows, safeguarding the company from adverse currency movements.

- **Interest Rate Swaps:** XYZ utilizes interest rate swaps to transform its variable-rate debt into fixed-rate debt, mitigating the impact of rising interest rates. This strategy helps in stabilizing interest expenses and enhancing predictability in financial planning.

**Objective Type Question:** What financial risk management strategy does XYZ Corporation employ to transform its variable-rate debt into fixed-rate debt, mitigating the impact of rising interest rates?

A) Currency Hedging

B) Interest Rate Swaps

C) Forward Contracts

D) Options Trading

Choose the correct option and provide a brief explanation of your choice based on the case study.