Tools To Control Foreign Exchange Risk

Economies and markets can be really unpredictable at times which may affect your business. So, you can make some strategies regarding the crucial times when the rates go against you. You don’t need very large plans but simple and effective ones that would help you to get through. There are certain tools using which you can plan your business to control the foreign exchange risks.

Some foreign exchange tools are:

Hedging with the money market – Companies that can access the international money markets for short term borrowings as well as investments, can use it for hedging transactions exposure. There are many options for pricing depending on various aspects like strike price, interest rate differentials, amount, swap rate, etc. Contracts are bind to the holder without the necessity to take the contract in the option. Strike price is the price at which the option is obliged; and a premium amount is charged by the option writer.

Hedging for forward market – In a course of business, a company or firm will have several contracts in many currencies expiring on different dates. The difference between total outflows and inflows pending for settlements is the net exposure of a particular currency on a particular date. The procedure is quite simple with the foreign currency being sold forward and contractual net outflow being brought forward.  

Hedging with currency futures – In this procedure, a payable is hedged when buying futures and receivable is hedged when selling them. The futures have a high liquidity and are easier to unwind due to their organized exchange on large turnovers.

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