Managing foreign exchange rate fluctuation is expected to protect multinational corporations from the bad effects of this change in exchange rate. To manage and hedge currency fluctuation risk there is two methods the company should use; these two methods are internal and external methods.
Internal method is the method that work on the management of the company’s financial statements without any relationship with any company outside the corporations that are concerned, whereas external methods works on making contractual relationships with other companies to reduce potential exchange rate losses.
There is two main ways for internal methods to manage exchange rate fluctuation, first one by leading, lagging, and netting, balance sheet hedging and pricing policies in short-term cash flows. Secondly by international diversification in manufacturing and financing decisions in the long-term cash flows.
External methods are contracts and derivatives such as currency futures, currency options, and currency exchange.