What can importers/exporter do about currency risk?
1. Negotiate the contract in domestic currency ($). 2. Wait and see. Take the risk of using spot market at time of delivery, and hope for a favorable ex-rate movement. 3. Lock in a forward ex-rate today with a forward contract, either for the entire amount (full hedge) or for a portion of the total (partial hedge). Example: Importer needs to buy Yen in six months. He/she can buy Yen forward today at the 6 month forward rate, and lock in a guaranteed ex-rate now for when the contract is due in 6 months. Locking in an ex-rate locks in a cost of the imported product in US dollars. If they will need ¥10m, they can buy ¥10m forward (full hedge) or just ¥5m for example (partial hedge). Exporter will receive ¥ in six months, and convert into (sell for) US dollars. They can sell Yen forward now at the 6 month forward rate. Lock in a guaranteed ex-rate, and thereby lock in a fixed amount of revenue in US dollars. Full hedge or partial, sell ¥10m forward, or just ¥5m forward. Forward rates and f
