With the rise in globalization, companies are exposed to foreign exchange risks. These risks are mostly felt by companies that engage in exporting and importing their products. It is also applicable to companies that invest in international ventures. Exchange rate risks are the unavoidable risks of investing in foreign territories. These risks are mostly felt by investors and businesses that are closing out deals with foreign currencies (Engel,2016) . They might end getting losses as a result of fluctuations in exchange rates. A company that trades in foreign currency is exposed to several exposures; the first one is economic exposure, which occurs when a company’s market is impacted by currency volatility. The second one is contingent exposure is the risk faced by a company as a result of bidding on projects in foreign currencies (Apergis & Artikis,2016) . Finally, there are exposures associated with changes in foreign exchange rate; it affects the financial reporting standards of the company. This exposure is known as translation exposure. With all these aspects it is essential for a company to protect its interests.
Hedging
Hedging is a strategy used to avoid foreign exchange risks by being actively involved in forex trading. Risks are minimized by limiting the exposure of investment, the buying and selling happen concurrently. Hedging has several strategies that are in line with the company’s exposure needs. For instance, transaction exposures faced by Fur can be reduced by using exchange derivatives such as futures contracts or currency invoicing techniques among others. Fur could embrace Currency invoicing; it is the practice of invoicing transactions in the currency that is beneficial to the firm. Although currency invoicing will not eliminate all the risks, it will facilitate the transfer of risks from one party to another. Invoicing imports in the company’s home currency transfers risks to the exporter.
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The company can also adopt an alternative strategy for financial hedging to manage economic or operating exposures. This situation requires caution in the selection of production sites with the aim of minimizing costs, diversification of products to more countries and developing strong development and research activities. These moves, however, should be focused on product differentiation. The company can relocate production to another country by observing currency fluctuations around the world. Translation exposures occur as a result of discrepancies between a company’s net assets net liabilities on a balance sheet (Engel,2016) . They can be handled by performing a balance sheet hedge on their transactions. These exposures are dependent on the accounting standards practiced in the home country. It is advisable that Fur acquires an appropriate amount of exposed liabilities and assets to balance off these discrepancies.
Analysis of the Business Operating Cycle
This is another strategy that the company can employ to deal with fluctuations in the foreign exchange markets. The company should analyze the operations and their day to day activities to identify the high-risk areas. This analysis will help determine the sensitivity of profit margins to the fluctuations in foreign exchange rates. This way, the company will be able to put protective measures in place.
Foreign Exchange Contracts .
This strategy can also be referred to as a forward exchange contract. It is a binding agreement between two companies with a deal to buy or sell at a specified amount of currency at an agreed exchange rate in the future (Apergis & Artikis, 2016) . The forward exchange rate is a fraction of the current exchange. Unlike in options where the holder has a right to buy and sell a given amount of currency at a fixed exchange rate in the future: the forward exchange contracts are subject to changes in the market regulations and the legal powers of the two states.
References
Apergis, N., & Artikis, P. G. (2016). Foreign exchange risk, equity risk factors and economic growth. Atlantic Economic Journal , 44 (4), 425-445.
Engel, C. (2016). Exchange rates, interest rates, and the risk premium. American Economic Review , 106 (2), 436-74.
