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Hedging foreign exchange risk

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What Does Foreign-Exchange Risk Mean?

1. The risk of an investment's value changing due to changes in currency exchange rates.
2. The risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates. Also known as
"currency risk" or "exchange-rate risk"



Hedging transaction risk - the internal techniques
Invoice in home currencyLeading and Lagging: It refers to the adjustment of the times of payments that are made in foreign currencies. Leading is the payment of an obligation before due date while lagging is delaying the payment of an obligation past due date. The purpose of these techniques is for the company to take advantage of expected devaluation or revaluation of the appropriate currencies. Lead and lag payments are particularly useful when forward contracts are not possible.Matching: When a company has receipts and payments in the same foreign currency due at the same time, …

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