How to Control Foreign Exchange Risk

Foreign Exchange Risk and its Control  is CA (final - New)'s topic. In this topic, you have to explain different steps to control foreign exchange risk. All corporates demand from a CA that he should be perfect in strategic financial management. To manage foreign exchange risk is also part of strategic financial management. Moreover, all corporates who are operating their business more than one country, have to show profit or loss from foreign exchange fluctuation in their quarterly financial reporting. Decrease the value of your company's currency in overseas means decreasing the profit from foreign exchange or loss from foreign exchange.  So learn the steps to control foreign exchange risk.

Ist Step : Reduce Risk with Derivative Contracts

Suppose, you have to take some money from another country. If you estimates that its value will strong than your country's own currency. At that time, you can take part in derivative market. You can sell same currency and in consideration, you can buy your own currency. With this, you can reduce the risk of foreign exchange.

2nd Step : Deposit  Earned Money in Foreign Bank

If your own currency's value is low than foreign currency. At that time, you need not bring money from that foreign currency. Just open your bank account in that foreign country and deposit money in it. Suppose, you are Indian businessman and you earned  500,000  from Singapore. At this time, your currency of $ 1 =1.23 S$. If you estimates that its value will become rise in future. You can hold your money in Singapore bank. It is good way to reduce foreign exchange risk.

3rd Step : Deal in Currency Swaps

You have to exchange your currency's principal amount of given loan + receivable interest  for same type of loan and interest in other currency.

In this currency swaps

a) There are two parties. Your company and other.

b) Your company want to get cheaper loan of other country's party (Counterparty). Other country's party wants to present value of your loan. Both can deal currency swap just like foreign exchange deal. But it can control your foreign exchange risk.

Related : Convertibility of Rupee


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Accounting Education: How to Control Foreign Exchange Risk
How to Control Foreign Exchange Risk
Accounting Education
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