The value of the foreign direct investment may decrease if the currency exchange rate between two countries fluctuates in an unfavourable direction. A second alternative for investors is to use hedging measures to reduce or eliminate currency risk. The following are a few strategies undertaken to minimize risk:
*Currency Exchange Traded Funds (ETFs) may be used to reduce the impact of fluctuations in exchange rates on a portfolio.
*hedging measures can safeguard a foreign investment against currency risk upon reinvestment in the shareholder’s home currency.
* Forward contracts include a rate lock, which enables overseas money to be changed back into the domestic currency later.
* Options contracts are more versatile than forwards but require an upfront premium.
The danger of incurring financial loss because of adverse changes in exchange rates is known as currency risk. It may be difficult to figure out how a company’s cash flow will be impacted by changes in the value of a particular currency. The following procedures may be used to mitigate foreign exchange risks.
1. Analyse your operating cycle.
2. Recognize your distinct currency flows
3. Determine your own guidelines for FX risk management and adhere to them.
4. Limit your currency risk exposure
5. Save time by having foreign exchange procedures automated.”