How do you manage Foreign Exchange FX Risks?


FX risks in a corporation can arise from buying and selling in different currencies, holding offshore assets valued in different currencies or foreign currency deposits.

Before you manage your FX risks, you will need to understand the FX risk exposures of your company. This can be done by projecting your foreign currency cash flows from your buying and selling. You can also perform a sensitivity analysis to understand the potential impact of FX movements on your business P&L. Some companies also calculate their ‘value at risk’ or VaR to calculate the probability of a given change in exchange rate happening and model the impact of FX movements on their FX exposures.

Once you have identified your FX exposures and risks, you can decide whether to hedge perfectly or partially. It might be difficult to achieve a perfect hedge because it is often difficult to predict with certainty the timing of forecasted cashflows. You can hedge with various hedging instruments (or derivatives) like FX forwards, futures or options. You can long or short these instruments by contacting your relationship banks, but note that there is a hedging cost and different banks may charge you differently for the same instrument.

Alternatively, if you do not want to use these derivatives, you can try to create a natural hedge (e.g. borrow / deposit in foreign currency or structure your sales and purchases to be in the same currency so that the foreign currency exposures net each other out).  

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