How do I protect myself against foreign exchange fluctuations on my foreign sales?
Hedging is a strategy of matching a foreign receivable with the purchase of the same foreign currency. This matches a buy and sell transaction and thus covers your risk of the currency changing in value.
Cash flow hedging is a great way for companies to minimize exposure to foreign currency fluctuations on foreign sales. There are two types of cash flow hedging that can be used to eliminate the risk associated with fluctuations in exchange rates:
Forward exchange contracts
With this option, the company enters into a contract to sell foreign currency at a future date which creates a foreign payable to hedge against the foreign receivable. By entering into a contract to sell foreign currency equivalent to the foreign receivable, the company would effectively fix the forward exchange rate at the contract date. Thereby eliminating the risk associated with fluctuations in the exchange rate. This option works well with fluctuating levels of foreign sales.
With this option, the company would acquire foreign debt with annual principal repayments equal to the expected annual foreign sales. If sales and repayment of foreign debt coincide in terms of amount and timing, the hedge is effective. The company would obtain foreign debt and use the foreign cash received from sales to repay the principal and interest on the debt. This option works well if foreign sales are steady and regular. It also avoids the broker fees associated with the forward exchange contract.
If you are interested in learning more about cash flow hedging to protect your company from the risk associated with fluctuations in exchange rates, please contact us for help on this issue. for our help on this issue.Download a copy of this issue