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by applying the hedging to minimize currency fluctuations
How does a company reduce foreign currency exchange fluctuation risk? A key factor in operating in export markets is the currency exchange rate movements. The nature of the worldwide currency markets means that predicting the future is almost impossible. There are many factors that affect the currency exchange rates and from all around the globe but good old supply and demand makes the rates. A key driver to currency exchange rates is the interest rates applicable in different countries. As a rule of thumb if one country offers significantly higher interest rates then investors will want to put money into that economy, thus increasing demand for the currency. Oil prices also have an affect on exchange rates as does politics. A cross border company purchase will mean that a company may have to buy a significant amount of currency at once. Sentiment can move a market as can a sporting result! So it is almost impossible to know the future - although one thing is clear; you can't do much to influence currency exchange rates. However you can take certain measures to protect your business as best you can against foreign currency fluctuation. These strategies help reduce your prices and allows you quote or sell products in local currencies. When buying or selling foreign currency you can either do it as and when you need to at the prevailing exchange rate or you can try and do it when the currency exchange rate is advantageous. A very simple form of currency hedging is to exchange the currency in tranches. If you are uncertain if the exchange rate is going for or against you then you can exchange it in parts, thus spreading the exchange rate. Another currency hedging tool to protect you against fluctuating exchange rates is a 'Forward Contract'. A Forward Contract is a risk management tool that helps you manage your currency requirements. A Forward Contract allows you to agree an exchange rate today to buy or sell currency at a date in the future. A Forward Contract offers many benefits in the exchange currency markets. Payments or receivables in the future can be priced in your currency with certainty and so you can accurately budget and forecast. A Forward Contract is especially attractive if the prevailing exchange rate is in your favour as you get the added benefit of this. Indeed many customers will buy Forward when the rate is good. On agreeing a Forward Contract a5% deposit is required (10% is more than6 months forward). The95% balance is payable before the contract date allowing your own funds to be employed elsewhere. The Xchange Business can also offer 'Time option Forward Contracts' which allow more flexibility. The contract can be set between two dates and the currency can be 'drawn' in any amounts between these dates.
Reduce risk to foreign currency fluctuations in money markets and achieve exchange rates that work best for your business.
See more on :http://www.ausight.com.au
One way of mitigating currecy risk is through hedging the forex exposure earlier enough i.e upon commitment so that on due date payments can be made available at the required currency. This has to be done utilizing all sorts of instruments such as Options or staight forward cover which can be done through your bankers at a competetive price.
