How Do You Manage Foreign Exchange Risks?
The profits of corporations that do business in more than one country are influenced each quarter by foreign exchange rates. Naturally, it receives revenue from operations in foreign countries in the local currency, but when it states its earnings and publishes financial statements, it will do some in the currency of its home country. If a U.S. company operates overseas and the value of their foreign currency revenues decreases during the reporting period, those funds will translate into fewer dollars. To manage foreign exchange risks, multinational companies usually hedge their expected foreign currency revenues with foreign exchange derivatives. Hedge with futures or forwards contracts. The predominant way to manage foreign exchange risk is to offset foreign currency holdings or expected revenue with futures or forwards. For example, a company expected to take in a million euros might can sell short a million euros worth of contracts or buy long the equivalent amount in dollars. The
