Question

In today's economic environment, how can a firm position itself to minimize currency hedging?

Answer 1

There are a different method to minimize currency hedging as follows:-

1. Invoicing in Domestic Currency:- This method is useful in transactions likes Export & Import of good & services by invoicing the payment in the Company's own domestic currency. This avoids foreign exchange exposure.

2. Netting:- Where there are too many transactions between two company's then this method is very useful which allow companies to net out there own payments. i.e intergroup transactions. Netting reduces banking cost and also increases transparency.

3.Money market hedging:- In this method, there is an agreement to exchange a certain amount of currency for another currency. It gives companies the flexibility to adjust the amount to be hedged, but with bit complication.

4. Derivatives Products:- It is a bilateral contract with both the parties whose value depends upon the value of the underlying asset. These derivatives can be of various types:- Forward, Futures, Swaps, Options and many more.