urrency risk mitigation strategies
The most common strategies in this regard are listed below.
Matching currency flows: This is a simple concept that requires foreign currency inflows and outflows to be matched. For example, if a U.S. company has significant inflows in euros and is looking to raise debt, it should consider borrowing in euros.
Currency risk-sharing agreements: This is a contractual arrangement in which the two parties involved in a sales or purchase contract agree to share the risk arising from exchange rate fluctuations. It involves a price adjustment clause, such that the base price of the transaction is adjusted if the rate fluctuates beyond a specified neutral band.
Back-to-back loans: Also known as a credit swap, in this arrangement two companies located in different countries arrange to borrow each other’s currency for a defined period, after which the borrowed amounts are repaid. As each company makes a loan in its home currency and receives equivalent collateral in a foreign currency, a back-to-back loan appears as both an asset and a liability on their balance sheets.
Currency swaps: This is a popular strategy that is similar to a back-to-back loan but does not appear on the balance sheet. In a currency swap, two firms borrow in the markets and currencies where each can get the best rates, and then swap the proceeds.
Read more: Exchange Rate Risk: Economic Exposure | Investopedia http://www.investopedia.com/articles/forex/021114/exchange-rate-risk-economic-exposure.asp#ixzz47NSpJklx
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