Foreign Exchange Risk Mitigation Techniques
Unit 2.1- Foreign Exchange Risk Mitigation Techniques
The globalization of business generates foreign currency risks. This process is irreversible and critical to the survival of most industries and businesses. The “globalization process” affords enormous opportunities to diversify business risk, generate economies of scale and capture additional market share.
Companies can no longer state “Our company deals only in US dollars” since this approach is not sustainable in global trade. It is estimated that 40% of all international trade is denominated in foreign currency. Trillions per day move through the foreign exchange markets. Political factors determine that not all currencies are convertible. Commercial trade is full of challenges, many of which may be overcome by utilizing the options available in this section.
The goal of this material is to introduce you to mitigation techniques and their required documentation related to foreign exchange (FX) risk. By the end of this unit your will be able to:
- identify foreign currency risk.
- identify the different instruments available in the FX market to hedge FX risk.
- identify the features of a FX spot transaction and the documentation required for a spot transaction.
- describe transfer pricing and its use as a FX risk mitigation tool.
- Rates of Exchange
- Market Drivers
- Measuring FX Exposure
- Business Needs for Foreign Currency
- Foreign Exchange Trading
- Common Instruments to Offset Risk
Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/02/01: Knowledge of foreign exchange risk mitigation techniques and required documentation (e.g., hedging tools, currency option contracts, transfer pricing)