How do you mitigate currency risk in international trade?

Foreign currencies in international trade and the changes that occur in their rates can be hedged through a number of points: 1/ Historical tracking of changes in currencies, which helps in predicting the future. 2/ Trying to contract on different currencies and not sticking to one currency, which helps in having a portfolio of currencies whenever possible. 3/ Immediate collection of deals and not relying on forward sales in international trade mitigate the impact of changes in foreign currency rates. 4/ It is possible to hedge in international trade contracts by setting a financial condition that deals with the impact of material changes in the currency rates of the deals.

In exposure identification process it’s easy to identify current accounts but sometimes it’s very difficult to identify futures exposure. If you have sporadic transactions with foreign partners the most difficult part of the process is to define when the company will do them in order to hedge your position correctly. If you have many transactions you can open a hedge position with a expiration related to company financial closing. Another topic to analyse is how much you buy and sell in a foreign currency. Example: if you sell and buy 100 at the same time you don’t need to hedge because if your exchange lost will be the same as exchange gain. The planning process is very important because it has to define both when and how much.

Keep an eye on a country's: - Current Account/ Balance of Payments - Currency reserves/ gold reserves - Debt/GDP ratio - Commercial rate borrowings/ maturities in the near/ mid term. - Present interest rate and whether it matches off to the daily fixing ( do fwd points make sense). - Key Trading partners ( to understand geopolitical/macro risk).

In my experience identifying the exposure is one thing, to not just survive but thrive requires some creativity. Use your opportunities. For currencies that may be somewhat volatile, Favour contracts or deals with immediate collection of value.

An example from my professional experience is the impact of currency volatility on my salary - as my employer calculates the currency value of USD base salary mid-month yet the salary is deposited at the end of the month. In economies experiencing high volatility a lapse of even 7-10 days will significantly impact the salaries and therefore purchasing power of employees. Such small details matter and should be advocated for.

More often than not you can use some kind of natural hedge or diversification without spending a lot on experts. For example, you have a currency risk because one of your large customers is paying you in local currency. Instead of covering the risk using swaps or futures, you could find a natural hedge in a local manufacturer or distributeur which you can pay in the same currency.

It is instructive for a company to forecast exchange rate trends. The confidence of the forecasted prices can determine a hedging strategy, where a more certain appreciation would encourage hedging for an exporter, and a more certain depreciation would discourage hedging for an exporter. On the other hand, a more certain appreciation would discourage hedging for an importer, and a more certain depreciation would encourage hedging for an importer. A variety of quantitative forecast models exist, including autoregressions (ARIMA) and vector autoregressions that factor in multiple variables. In reality, political shocks are more unexpected that what can be modelled quantitatively.

In addition to the technical tools described in the description - more simpler way of hedging yourself is purchasing reliable currencies (on the spot) like USD or EUR, or opting into government programs which offer such hedging including currency protected deposit (KKM) program offered by the Turkish government which pays interest above market rates and offers protection against devaluation of the turkish lira.

The safest way is to increase the share of same currency based trade. For example, if your costs are mainly EUR basis, your no: 1 target market should be the EU.

Market diversification is one good way of mitigating currency risks & dependency on traditional import and exports (trade) markets for your goods and services. It provides a country with the opportunity to have several “eggs in a basket”, in terms of the currencies you trade with and terms of trading partners. The impact of currency volatility and disruptions to trade will be lesser felt if you diversify in terms of your trading partners and the currencies that you utilise for international trade. It could reduce risks (potential negative impact ) on your economy due to external factors.

Suppose your company sell in a particular foreign currency. To mitigate exchange rate risk it could be useful (if it is possible) to make some purchase in the same currency in order to offset lost with gain.

To me this reason seems very academic. I never saw "mitigating currency risks" as an objective by any Austrian company (independent of size) for choosing to enter a new market. Smaller companies might choose to expand in geographic areas that have the same currency or are begged to this currency (most of Europe) because they want to avoid risks. Having said this, the new initiative of the BRICS to increase trading in local currencies might see more activities in this regard.

In my experience billing in your own transaction currency is by far the cheapest and least complicated way to reduce the currency risk for SMEs. Several points have to be taken into consideration however, e.g. number of transactions (for a one of payment easier than for a rolling contract), inflation in the target country (easiest certainly where the currency is floating within a certain bandwidth) and the ability of the client to pass on price increases to the local customers in case of fluctuation of the exchange rate (after all you will not be able to collect your payment if your client goes bust), etc.

Investors would have to refrain from purchasing any foreign assets in order to reduce currency risk in international trade. However, using currency forwards or futures, exchange rate risk can be reduced. Changes in the investor's home currency relative to the foreign investment currency are what lead to exchange rate risk.

If your currency isn't widely used in international trade, consider that many small currencies are tied to bigger ones. For instance, the Danish krone is linked to the Euro. By billing in larger, pegged, currencies, you make things easier for your clients and protect against ups and downs in your local currency's value. Plus, by keeping money in these currencies in online accounts like Wise, you can potentially avoid costs from changing money back and forth.

Currency risks can be partially mitigated if partner countries are members of an economic integration mechanism, such as a free trade area. In that situation, the firms within countries might have a better understanding of the demand in the purchasing country, hence, the adjustment in prices might be easier. Yet, this is conditional on the kind of products: it is well known that commodities are more prone to price swings, whereas industrialized goods face a more homogeneous price schedule. Yet, the post-covid scenario was characterized by a shortfall of components, such as computer chips, which might prove that swings in price are hard to avoid. Transparency among economic partners is key in commercial relations, despite economist parlance.

In the financial market there are a lot of companies that offers many services. In global trade transactions what companies are looking for are: - low costs - fast fund transfers - possibility to tracking the transfers - possibility to have many currencies as they want Every company should contact at least 3 or 5 potential partners to understand the differences in offered services.

Buy art related assets, then sell them in the country of your currency choice, you will build up currency reserves that yu can then leverage reducing currency risk exposure

Push for cross-border business expansion and operational growth Businesses in an home country involved in international trade, depending on the potential ownership, location, and/or internationalization advantages of prospectful foreign countries it trades with, should consider direct investment and business growth/expansion options into those economies. Achieving this diversifies the currency portfolio of these businesses and someway hedges them from vulnerability to volatility of any single economy at any given time.

In some countries, the upside of holding foreign currency can significantly outweigh the risk, especially when the local currency is rapidly devaluing. Take the Pakistani rupee relative to the US dollar, for example. If a Pakistani business earns in dollars but incurs most of its costs in rupees, they are likely to experience a financial advantage. As the rupee devalues against the dollar, the purchasing power of the dollar earnings increases in local terms.