Techniques To Manage Foreign Exchange Risks

Techniques to Manage Foreign Exchange Risks
A company manages risks by exchange rates fluctuation. These fluctuation rates impact on every transaction of the business like sales and costs, foreign transaction and asset. This risk also can affect small individual investors who are involved in international investment to the companies who are involved in international business. How do mitigate risk in this arena? The answer is simple, by using derivatives financial instruments to hedge exchanges rate risk, which includes options, forwards, futures and swaps.

Forward Contract:
The most common way of hedging transactions. In the forward market the price of the foreign currency is agreed at the time of transaction.

Spot Trades:
Based on the current market rate, spot trades are executed. A spot trade is executes after a price is offers, accepted and delivery made after two days.

Exchange the foreign currency with the local currency for a fixed period of time and then swap back if necessary

Short Term Exchange Rates:
Short terms rates are issued for short term investment analysis (3 year or less).

Long Term Exchange Rates:
Long terms rates are issued for long term investment analysis (3 year or more).