User:Jupramai/sandbox

Management
Each hedging strategy comes with its own benefits that may make it more suitable than another, based on the nature of the business and risks it may impose. Forward and futures contracts serve similar purposes - they both allow transactions take place in the future for a specified price at a specified rate in order to offset any exchange fluctuations against you. Forward contracts are to an extent more flexible, because they can be customized to specific transactions whereas futures come in standard amounts and are written based on certain commodities or assets, such as cattle or other currencies. Because futures are only available for certain currencies and time periods, they cannot entirely mitigate risk because there is always the chance that exchange rates do move in your favor. However, the standardized feature of futures can be part of what makes them attractive to some and is well-regulated because they are traded only on exchanges.

Currency invoicing refers to the practice of invoicing transactions in the currency that benefits the firm. It is important to note that this does not necessarily eliminate the foreign exchange risk, but rather moves it to from one party to another. A firm can invoice its imports from another country in its home currency, which would move the risk to the exporter and away from itself. This technique may not be as simple as it sounds; if the exporter’s currency is more volatile than that of the importer, the firm would want to avoid invoicing in that currency. If both the importer and exporter want to avoid using their own currencies, it is also fairly common to conduct the exchange using a third currency that is perhaps more stable. This may be done if they cannot use any existing instrument between their currencies.

If a firm looks to leading and lagging as a hedge, they must exercise extreme caution. These acts refer to the movement of cash inflows or outflows either forward or backward in time in a way that may benefit the achievement of other goals. For example, if a firm must pay a large sum in three months but is also set to receive a similar amount from another order, they might move the date of receipt to meet their other payment deadline. If this date is moved sooner, this would be leading the payment; if it were moved later and delayed, it would be lagging.

By paying attention to currency fluctuations around the world and how they relate to the home currency, firms can relocate their production to another country. For this strategy to be effective, the new site must have lower production costs. This can help meet any excess production needs that would incur larger expense elsewhere and would allow the firm to take advantage of that extra capital. If the firm has flexibility in its sourcing, they can look to other countries with greater supply of a certain input and relocate there, to reduce the cost of importing it. There are many factors a firm must consider before relocating, such as a nation’s political risk and overall state of the economy. By putting more effort into researching alternative methods for production and development, it is possible that a firm may discover more ways to produce their outputs locally rather than relying on export sources that may expose them to the foreign exchange risk they are trying to avoid.