Exchange Rate Risk Management

Exchange Rate Risk Management helps reduce the financial risks arising from exchange rate movements. This can be helpful for those businesses either exporting or importing goods, services or capital. The most common forms of exchange rate hedging include Foreign Exchange Contracts and Foreign Exchange Options.

Foreign Exchange Contracts provide protection against unfavourable movements in the exchange rate by setting an exchange rate for delivery at a future date. This provides the hedger with certainty around future cash flow amounts and can assist with budgeting. No business wants to see their profit margins eroded by movements in exchange rates which could have been hedged.

Foreign Currency Options provide greater flexibility by giving the owner/hedger the option to exchange currencies at a specified rate on a specified future date if the exchange rate has moved unfavourably. It does however, give the owner the ability not to exercise the option and take advantage of any favourable currency movements.