Consequence of foreign exchange rate risk

Question

What are consequence of foreign exchange rate risk and how do this risk be mitigated?

Answer 1

The level of uncertainty Foreign exchange risk is that a company must manage for changes in foreign exchange rates which will badly affect the money the company receives for goods and services over a period.

Let’s take an example a company sells goods to a foreign company as they wanted to move the goods same day but will not receive payment for numerous days, weeks or months. During this period, the exchange rates varies. At the time of settlement when the foreign company pays to the domestic company for the goods, the rates may have moved to a level that is less than what the company expected. Resulting the company may suffer a huge loss or the profits may erode.

To manage or minimize the risk, companies enter into contracts to purchase foreign currency at a specified rate. This will permits to the companies to minimize the uncertainty of the risk so that they can accordingly price their products.