Foreign exchange risk

Foreign exchange risk: a major risk

⚠ When a company negotiates commercial contracts involving commitments with foreign currencies, a risk arises: currency risk.

🖋 Faced with this situation, the company will hedge its risk in order to reduce, transform, control or even eliminate foreign exchange risk. There are 4 main categories of hedging behavior.

But what products are available to manage exposure to currency risk?

There are several financial products that can be used to hedge currency risk, such as :

📍The forward contract: this involves buying or selling foreign currencies for delivery at a predetermined future date and at an exchange rate fixed today, known as the forward exchange rate.

📍Le Hedging: hedging a risk taken by one position by taking a second position reversing the risk. The negative and positive effects of the two positions therefore offset each other.

📍The currency option: This is a financial instrument that offers the possibility of buying or selling currencies at a set exchange rate. The date may or may not be fixed in advance, depending on the option chosen. To acquire an option, a premium must be paid on the day the contract is signed.

In addition, protecting yourself against exchange rate fluctuations partly involves hedging with various financial products, but also anticipating them by asking the right questions, such as :

What are the company's foreign exchange risk objectives?
Which exposures should be hedged?
What techniques can or cannot be used?

A company that anticipates these risks and implements a currency management policy will be able to :

💪 Stabilize profit margin.
💪 Maintain prices.
💪 Facilitate budgeting.
💪 Keep a good credit rating with banks.
💪 Minimize the effects of exchange rate fluctuations on its gross margin.

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