Posted by forex at 7:53 AM
Read our previous post
1. Identify your foreign exchange exposure. What cash flows do you need to convert into other currencies? What are those currencies? Also net out the incoming and outgoing cash flows denominated in the same currency--for example, if both your revenues and costs are denominated in Canadian dollars, your foreign exchange exposure is limited only to profits, which you may want to expatriate.
2. Analyze the possibilities of exchange rate movements and their possible effects on the cash flows of your business. Are the exchange rates that you are exposed to likely to move? In what ways? Are they volatile (often go up and down) or stable? Consult expert opinions and forecasts to help you answer these questions.
3. Plan your hedging strategy. Review different hedging options. The most popular and effective hedging instrument is an FX option. An FX option is a contract that gives the buyer the right, but not the obligation, to buy or sell a given amount of currency at a certain price (strike price) by a certain date.
4. Buy hedging instruments that will help you minimize your foreign exchange risks. Continue monitoring the foreign exchange market on a continuous basis and adjust your hedging accordingly. If the volatility in currency markets rises, buy more FX options; if it falls, feel free to sell some.