Management strategy for reducing Foreign Exchange Rate risk

 

One management strategy for reducing Foreign Exchange Rate risk is to employ Futures Contracts and Forward Contracts.

 

Explain when each strategy is most appropriate.

 

Sample Solution

Foreign exchange risk is an intrinsic part of doing international business. The values of major currencies constantly fluctuate against each other, creating income uncertainty for your business. The simplest risk management strategy for reducing foreign risk is to make and receive payments only in your own currency. But your cash flow risk can increase if customers with different native currencies time their payments to take advantage of exchange rate fluctuations. So you may therefore find that competitive pressures force you to explore a risk management strategy that helps manage your foreign exchange risk efficiently. Simple foreign exchange hedging involving currency forward contracts is the heart of FX risk management strategies for many businesses and is built into their FX international payment platforms.

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