Currency Risks Mitigation Strategies
There are a lot of strategies companies adopt in order to deal with currency risks. Following are some most common mitigation strategies companies adopt to deal with these important risks:
1. Matching currency inflows and outflows:
This is the simplest concept that needs foreign currency variation to be balanced. For instance, is a Parisian company has important inflows in dollars and is seeking to increase debt, it must consider dealing in dollars.
2. Currency risk-sharing contracts:
A contract in which both companies involved in sales or buy agreement agree to divide the risk equally arising from fluctuation of exchange rates. It also contains a price modification clause, in a way that the actual amount of the deal is attuned if the currency rate fluctuates further than a particular neutral bond.
3. Back-to-back or credit swap loans:
Back-to-back loans are known as credit swap loans, in these agreement two parties located in completely different countries organize to have a loan in each other’s exchange for a definite period, after the set period the loans are reimbursed. As both the parties borrowed money in its own home currency therefore, gets equal security in other country’s currency, these types of loans appears as the two sides on the balance sheet will be equal.
4. Currency swap:
This strategy is as similar as to a credit swap loan and it won’t come on the company’s balance sheet. In this type of strategy, two companies have a loan of from the marketplace and exchanges where each company gets the best possible charges, and then exchange the proceeds.