Methods of Protection and Management of Currency Risks

Any foreign trade transaction involves a foreign exchange risk, ie the risk of currency losses caused by changes in foreign currency in which payment is made to the national.

Unfortunately, the company can not always choose the currency rates at their discretion, and even more difficult to predict the movement of the exchange rate.

As one of the protective measures against loss, you can use the simultaneous conclusion of export and import contracts in the same currency and with approximately the same maturity. In this case, the profits of the export contract and the loss of import are mutually compensated. But all gains and losses could be cut only when the balance of exports and imports. In practice, the enterprise, usually dominated by exports or imports. Then, in order to reduce risk are encouraged to enter both the export and import contracts in different currencies, with opposite trends in the fluctuations.

Thus, the considered methods of protection can be used as support, along with others.

A more reliable way to protect against currency losses is a currency clause. Its essence lies in the fact that the currency in which payment is made under a contract linked to a more stable currency and the amount of the payment is made dependent on changes in the course of a more stable currency. At the same payment currency may coincide or may not coincide with the currency rates.

In the first case, the currency is called the reservation line, in the second case - indirect.

However, neither direct nor indirect reservation a full guarantee against loss does not. The degree of assurance against loss depends on the successful choice of "anchor currency" is actually on correctly predicted the trend in the change rate of the currency.

The degree of assurance, if the "anchor currency" to take not one but several, and more, the better the degree of assurance. Such a reservation when as an "anchor currency" is used multiple currencies is multicurrency.

The question of whether or not to include in the contract currency clause shall be decided by the parties in the transaction, depending on specific conditions. If the payment currency is stable and the payment will be made after a short period from the date of the contract, this is not necessary. When installment payment on a long term reservation should be included as to predict the movement in exchange rates over a long period is impossible. And you must include, if the payment currency is unstable, even with a small gap between the time of payment and the term of the contract.
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