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Foreign Currency Losses

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Company X routinely purchases inventory from foreign markets. Transactions in foreign currency leaves Company X exposed to the risks associated with exchange rate changes.

What are some methods Company X could use to reduce its exposure to foreign currency losses?

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Foreign currency transaction exposure occurs from the time of agreement to time of payment. If a firm decides to take an active approach to foreign currency management this will center around the concept of hedging. Hedging a particular currency exposure means establishing an offsetting currency position such that whatever is lost or gained on the original currency exposure is exactly offset by a corresponding foreign exchange gain or loss on the currency hedge. Below are some of the hedging methods that a firm can use to reduce its exposure to foreign currency loses:

1. Forward market hedge: We can use the forward market to tie down the home currency value of the foreign currency payable or receivable. Contract is entered into immediately, but not fulfilled until time has elapsed. However forward market contracts may not exist for all countries, or may even be illegal for some currencies.

2. Money market ...

Solution provided by:
Umut Oltulu, MBA
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  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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