Managing Foreign Exchange Risk

The nature of foreign exchange risk was discussed already. There we described how changes in exchange rates alter the profitability of trade and investment deals, how forward exchange rates and currency swaps enable firms to insure themselves to some degree against foreign exchange risk, and how relative inflation rates determine exchange rate movements. In this section, we focus on the various strategies international businesses use to manage foreign exchange risk. We will examine the types of foreign exchange exposure, the tactics and strategies firms adopt in attempting to minimize the exposure to foreign exchange risk, and things firms can do to develop policies for managing foreign exchange risk.