What is meant by foreign exchange risk? What specific problems does foreign exchange present in an organization? How may an organization that needs Euros in 6 months protect itself from currency fluctuation?
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The risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates. Also known as "currency risk" or "exchange-rate risk.
it also means refers to the potential for loss from exposure to foreign exchange rate fluctuations.
Another currency hedging tool to protect you against fluctuating exchange rates is a 'Forward Contract'. A Forward Contract is a risk management tool that helps you manage your currency requirements. A Forward Contract allows you to agree an exchange rate today to buy or sell currency at a date in the future. A Forward Contract offers many benefits in the exchange currency markets. Payments or receivables in the future can be priced in your currency with certainty and so you can accurately budget and forecast. A Forward Contract is especially attractive if the prevailing exchange rate is in your favour as you get the added benefit of this. Indeed many customers will buy Forward when the rate is good.
On agreeing a Forward Contract a 5% deposit is required (10% is more than 6 months forward). The 95% balance is payable before the contract date allowing your own funds to be employed elsewhere. The exchange Business can also offer 'Time option Forward Contracts' which allow more flexibility. The contract can be set between two dates and the currency can be 'drawn' in any amounts between these dates.
Reduce risk to foreign currency fluctuations in money markets and achieve exchange rates that work best for your business.
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Dec 13th, 2015
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