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

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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.



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