Skip to main content

Hedging Foreign Exchange Risk During Ukraine-Russia War | Voice Of International Business

voice of international business


The Ukraine-Russia War has shaken the entire world-economy heavily. Business strategies of different countries of the world have changed with the emergence of this war since February 2022. Economic power houses like USA and European Union imposed various sanctions on transactions with Russia. Therefore, this war created volatility in the prices of foreign currencies.

 

Business organizations as well as the general people have become the victim of this fluctuation in the foreign-exchange market. Smart business organizations around the world are using different derivative products of the foreign exchange market. Hedging is one of the most powerful tools in this derivative group. Here we will discuss about how you can hedge a foreign exchange risk involved for import in US Dollar during the present scenario of Ukraine-Russia war.

 

What is Hedging

Hedging is the activity of minimizing the risk of financial losses by using different financial instruments/ derivatives.

 

Purpose of Hedging

Purpose of hedging is to reduce, minimize or eliminate the potential losses due to exchange rate fluctuations. Hedging a foreign exchange risk involves taking some special measures. In the following section we will discuss about some of them.

 

How To Hedge Foreign Exchange Risk

During the present scenario of the Ukraine-Russia war exchange rates, especially for US Dollar, have become very fluctuating. Here are some steps you can take to hedge foreign exchange risk involved in importing goods in US Dollars:

 

• Use Forward Contracts: Forward contracts are agreements between two parties to buy or sell an asset at a predetermined price at a future date. You can use a forward contract to lock in a specific exchange rate for the US dollar that you will need to pay for your imports.

 

• Utilize Options: Options are financial instruments that provide you with the right, but not the obligation, to buy or sell a currency at a specific exchange rate at a future date. By purchasing an option, you can limit your downside risk while still benefiting from favorable exchange rate movements.

 

• Maintain a Currency Diversification Strategy: By maintaining a diversified portfolio of currencies, you can reduce your exposure to a single currency, such as the US dollar, and potentially reduce your foreign exchange risk.

 

• Monitor the Situation Closely: Keep a close eye on the situation in Ukraine and Russia, as developments in the conflict could have an impact on the exchange rate of the US dollar against other currencies. Stay updated with the latest news and analysis to make informed decisions.

 

Finally, Seek Expert Advice. It is always a good idea to seek expert advice from a financial professional or a foreign exchange specialist to help you hedge your foreign exchange risk effectively. They can help you assess your specific needs and recommend appropriate hedging strategies.


Thanks for reading.



Labels:

Comments

Post a Comment

Popular posts from this blog

Import on “FOC” or “No Cost Basis” by Export-Oriented Industries in Bangladesh

FOC sounds like the Incoterms, FOB. However, it is a trade term not a recognized Incoterms. People dealing with import business may have seen various types of imports. In most of the cases payments must be made for the items imported. In some cases no payment is made. Every country has its own import policies and guiding rules for international trade. Procedures for import on FOC basis also differs based on those policies and rules. In Bangladesh this procedure is guided by the Import Policy Order (in force) from Ministry of Finance. It is also termed as Import on “No Cost Basis”. What is FOC or Free of Cost Import FOC or Free of Cost import means the process of importing goods for which no payment has to be made from the importing country. When goods are sent from abroad as a gift, free sample, replacement or raw materials for producing the ordered produce in the receiving country, no payment is required to be made by the importer. There are some limits for maximum amount of such impo
Post a Comment
Read more

Operational Exchange Rate for Banks and their Application in Banking Transaction

Many of us want to know about the operational exchange rate of banks and their application in day-to-day foreign-exchange-related banking activities. Customers receive different amounts of local currency for the same amount of foreign currencies in separate transactions. They often become confused. This article will help you understand the rates applied for different transactions in banks. Trade finance professionals, customers, students, and even resource persons may find this piece of writing worthwhile.  Here we will discuss the definition of the exchange rate, its different types and use, types of quotation, and how different rates are determined.  What is Exchange Rate The exchange rate means the rate at which one currency is exchanged or calculated in another currency. In other words, we can say this rate indicates how many units of one currency (for example, local currency)you need to pay to get one unit of another currency(foreign currency). Conversely, it is the rate at which
2 comments
Read more

Sample Process Flow of Export

Sample Process Flow of Export: Many newbies in the International Trade arena want to know about Export. In this article, we will discuss a sample process flow of Export for them. It will help new professionals, including new bankers working with commercial issues, understand the basic Export process.   Let us discuss first what Export is? Export is the process of selling goods to other nation or country. Selling within the country is also considered as an Export. However, we call this process a “Deem export” or “Local export”. Local export is much an easier process than foreign Export or Final Export. We will cover here a sample process of “Final export” or “Export”. One thing you should keep in mind that this sample process is a Basic process. So, there may be some differences in a real-life scenario. Don’t be disheartened. We will also focus on Local Export in a later section of this article.   Parties Involved in Export: The actual process of the Final Export is more
Post a Comment
Read more