The purpose of long-term foreign exchange management is not to cover a given foreign exchange exposure dealings on the forward markets, but to minimize and, if possible, eliminate such exposures before they become critical and therefore costly to cover. (Source: Havard Business Review – March/April 1977) Comment on the above statement and suggest what actions the financial manager should take in both the long and short term in order to reduce risks from foreign currency transactions.

Advanced Financial Management Block Revision Mock Exams

To reduce and possibly eliminate foreign exchange exposure/risks, the finance manager should do the following:

• Enter in forward contracts
• Enter into currency futures contracts
• Buy a call currency option when importing and a put current option when exporting.
• Use a money market hedge borrowing and lending depending on when the firm is expecting receivables or make payments.
• Where possible, use swap agreements (currency swaps) especially where foreign currency is needed to finance foreign operations.
• Leading (upfront payments/receiving) and lagging (delaying payment or receipt to future date)
• Matching the receipts and payments
• Netting – off especially where a multi-national firm has a number of subsidiaries overseas which owe each other some money.
• Holding a currency “cocktail” i.e a portfolio of currencies where a loss on one currency is offset a gain on another currency.

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