Managing Currency Risk in International Markets: A Focus on Currency Futures and Invoicing Strategy
Skoog, Loren (2024)
2024
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-2024111528367
https://urn.fi/URN:NBN:fi:amk-2024111528367
Tiivistelmä
This increased interconnectedness has enabled businesses to compete internationally, but it has also introduced significant financial risks. One of the primary challenges for companies operating across multiple countries is managing foreign exchange (forex) volatility. Exchange rate fluctuations mean that firms face risks to their finances that increase risk and can threaten the firm’s long term financial sustainability.
This thesis investigates transaction risk management specifically by focusing on individual international transactions rather than the broader category of forex risk. It explores a range of hedging tools, including currency futures and other derivatives, to provide information about the methods available for managing the impact of exchage rate flutuations on transactions. Through a combination of theoretical analysis and a practical case study, this thesis examines different exposure management strategies to help firms make informed decisions in planning their contracts.
The research yielded three key findings. First, active management of hedging strategies is essential for a firm to adapt to changing market conditions. Second, transaction-specific strategies, such as invoicing in the purchaser’s currency or a vehicle currency can help mitigate risk, with PCP generally being preferable for increasing demand. Third, for long-term contracts (exceeding one year), it is beneficial for parties to retain the flexibility to renegotiate payment terms as the market environment shifts. Overall, the study concludes that, while futures may lack some flexibility compared to options or forwards, they offer a cost-effective approach for hedging transactions with fixed amounts and timelines.
This thesis investigates transaction risk management specifically by focusing on individual international transactions rather than the broader category of forex risk. It explores a range of hedging tools, including currency futures and other derivatives, to provide information about the methods available for managing the impact of exchage rate flutuations on transactions. Through a combination of theoretical analysis and a practical case study, this thesis examines different exposure management strategies to help firms make informed decisions in planning their contracts.
The research yielded three key findings. First, active management of hedging strategies is essential for a firm to adapt to changing market conditions. Second, transaction-specific strategies, such as invoicing in the purchaser’s currency or a vehicle currency can help mitigate risk, with PCP generally being preferable for increasing demand. Third, for long-term contracts (exceeding one year), it is beneficial for parties to retain the flexibility to renegotiate payment terms as the market environment shifts. Overall, the study concludes that, while futures may lack some flexibility compared to options or forwards, they offer a cost-effective approach for hedging transactions with fixed amounts and timelines.