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Reduce foreign exchange risk

1. What can a firm do to reduce foreign exchange risk?

2. What are the differences between a forward contract, a futures contract, and options?

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1. The firm can hedge against foreign exchange risk in a number of ways. First, they can deposit funds into the foreign country's banks in the foreign denomination in a sufficient quantity so as to hedge against a downturn in the domestic currency. There are some opportunity costs associated with this method as the interest rate earned on the deposited funds will be less than could be earned elsewhere, but ...

Solution Summary

How a firm can reduce foreign exchange risk is determined. The differences between a forward contract, future contract and options are examined.