Posted by forex at 12:30 AM
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1. Identify the cash flows that you want to exchange into another currency. What cash flows do you have a need of exchanging? What exchange rates are you vulnerable to? Net out the incoming and outgoing cash flows denominated in the same currency--for example, if you have revenues and costs denominated in Japanese yen, you will need to worry only about expatriating profits, whereas an increase in costs as a result of an adverse exchange rate movement will also entail a proportional increase in revenues.
2. Analyze the exchange rates that you are exposed to. What is the likelihood of these exchange rates declining, rising or staying at the same levels? What macroeconomic variables cause exchange rates to go up or down? Consult experts' opinions and forecasts to help you answer these questions.
3. Link the amounts of money you will need to convert with the volatilities of the relevant exchange rates. Prepare different scenarios and see how much money you can lose as a result of adverse exchange rate moves. For example, look at your foreign exchange exposure in the case of an expensive U.S. dollar and cheap U.S. dollar.