What is the currency management?

currency risk management is a set of strategies and procedures used to minimize the exposure of losses associated with changes to exchange courses. One of the first steps is to minimize relying to the society on global exchange rates to maintain solvency. Furthermore, the company could diversify the various currencies that are kept as a way to deal with a systematic risk. Finally, the company can use derivative financial products such as currency attackers and swaps to ensure any residual unsystematic risk.

The currency risk is a market risk that directly threatens the financial welfare of international enterprises. Otherwise, known as a risk in foreign currency, losses occur when the exchange courses move and the company is forced to buy or sell the currency under unfavorable conditions. One example would be if the loan was in a foreign currency to create a new market. If a foreign currency becomes stronger, maybe the parent company will have to spend more local currencyrepay the debt before expected.

In currency risks management, it is essential to minimize the irregularities between the currencies of the asset and the obligation. It may be tempting to look for loans in low interest rates and invest in countries with high interest rates, especially if the exchange rates are currently favorable. However, if the company does not have a global presence that supports this speculation, it is dangerous and can unnecessarily expose the company interest.

Another common risk of currency to be controlled is inflationary risk. If the company holds investment in a foreign currency and depends on cash flows generated by these investments, the company's financial power would be prevented if the foreign currency suddenly had less value. One effective way to avoid this situation is to invest in various economies that have floating exchange courses, THUSA diversify the risk. By another approachTo manage monetary risks, it would be to invest in economies with currencies that were connected to the currency of the parent company. This would allow both currency to fluctuate together.

If monetary risk cannot be minimized by avoiding or diversification, there are many derivatives for monetary risk management. Both currency swaps and forward can be used to lock current exchange rates to ensure a short and long -term risk. Combined with call options and PUT, the products can be adapted to match the foreign currency strategy of any company. As with other derivative products, products used to minimize the currency risk may be very expensive and sophisticated.