DQ5A - W hat is meant by foreign exchange r isk? What...

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Unformatted text preview: W hat is meant by foreign exchange r isk? What specific problems does foreign exchange present in an organization? How could an organization needing Eu ros in six months protect itself from c ur rency fluctuations? When your business deals in a foreign currency you are exposed to certain r isks. For example, you might find that after agreeing a price for exported or imported goods the exchange rate changes before delivery. Clearly, this can work both for and against you. Some count ries' currencies and exchange rates are more volatile than others because of their in flationary or unstable economies. Your bank should be able to advise you about this. Of course, because exchange rates can go both up and down, i t can be tempting to gamble that this will work out in your favour. However, this is extremely r isky and could land you with a significant financial loss. I t's safer to reduce the r isk by using one of the forms of hedging available through a bank. Hedging simply means insuring against the price of an i tem - in this case, currency - moving against you in the future. There are many different types of currency hedging and your bank should be able to help you with the best solutions for your business. Two types of hedging are discussed in this guide - see the pages in t his guide on forward foreign exchange contracts, and buying currency options. You may also consider opening a foreign currency account - see the pages in this guide on opening foreign currency accounts. ...
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