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Ways in which to hedge the fluctuation of foreign currency

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What are ways in which a company may hedge the fluctuation of foreign currency? Which of these ways do you think is the most effective? Explain.

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The solution discusses the ways in which to hedge the fluctuation of foreign currency.

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What are ways in which a company may hedge the fluctuation of foreign currency?

With the changing global markets businesses are continually expanding by tapping into the global economy. The success of international businesses though is often determined by how volatile the foreign exchange rate is. The more constant the rate of fluctuations the more unforeseen losses or unexpected profits may encounter. Company often formulates strategies to protect against currency fluctuations which will create revenue and cost certainty of foreign currency transactions. Ways in which a company may hedge the fluctuation of foreign currency include: future and forward contracts, money market hedge, pricing strategies, options, settlement, re-invoicing, and netting.

Forward and future contracts are contracts to sell or buy foreign exchange at a future date at fixed exchange rates. In this case scenario the company benefits with the foreign exchange exposure having been offset since despite any fluctuations in the money market, the company can be able to purchase foreign exchange at a predetermined rate. The costs to this hedging only the cost of currency conversion and the transition cost of buying a forward contract. For this hedging strategy to be effective though management must effectively and efficiently assess the volatility of the exchange rate market and any other future expected ...

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