Question

In international finance, define currency risk mitigation and its strategy? provide some real life example

Answer 1

Defination

Foreign exchange risk management strategy or FX hedging strategy are terms used to define all the measures devised by businesses or investors to protect the value of their cash flows, assets or liabilities from adverse fluctuations of the exchange rate.

strategies to mitigate the currency risk:-

Hedging strategies are broadly classified as follows:

1. Forward Contract:- It is a contract between two parties for buying or selling assets on a specified date, at a particular price. This covers contracts such as forwarding exchange contracts for commodities and currencies. that means you are agreeing for the purchase or sell a particular curriency in future at a decided price. so you remove the loss from the volatility in the value of thee currency. today many investment banking companies like JP morgan Provodies the Forward contract on currency.
2. Futures Contract:- This is a standard contract between two parties for buying or selling assets at an agreed price and quantity on a specified date. This covers various contracts such as a currency futures contract. the only difference between the forward and future is the futures contracts are exchange traded and standardise contract size are availible. while the forward contracts are over the counter traded and customised in nature. the currency future in real life availible in the stock market for example in the india BSE and NSE bothe allows trading the futures of the currencies.
3. Option market Hedge:- A foreign currency option contract is a financial instrument that gives the holder the right but not the obligation to sell or buy currencies at a set price either on a specific date or before some expiration date. but there will be an option premium which the investor has to pay today.options are same like availible in the stock exchanges as they are also an exchange traded. take a real life example of the currency options those are tranding on the NYSE.
4. Money Markets:- These are the markets where short-term buying, selling, lending, and borrowing happen with maturities of less than a year. This includes various contracts such as covered calls on equities, money market operations for interest, and currencies.many banks are there today provies facilities to land aand borrow at specified rate in foriegn currency also. it just required normal bank so we can take any example for example we used city Bank american branch and HSBC Indian Branch to hedge the foreign exchange risk.