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Chapter 13

Managing foreign currency risk

Taking measures to eliminate or reduce a risk is called hedging the risk
or hedging the exposure.

5.1 Practical approaches

 Deal in home currency (reduces competitiveness)

 Do nothing (may end up better or worse off)

 Leading (if anticipate adverse movement in exchange rates)

 Lagging (if anticipate favourable movement in exchange rates)

 Matching receipts and payments (net off to reduce exposure)

 Netting (inter-company balances netted before payment)

 Foreign currency bank accounts (if lots of transactions in that currency)

 Matching assets and liabilities (e.g. pay for foreign asset with foreign currency
loan)

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