When committing foreign economic activity, many firms are forced to work with the currency values of other countries. This is the reason that firms are subject to the influence of price fluctuations for a particular currency, which is changed as a result of the action of supply and demand forces. In order to maximally protect themselves and their company from losses when changing the exchange rate, company directors use currency risk insurance. Having insured his currency risk, the entrepreneur loses some share of the profit from the foreign economic transaction, but gets a quiet sleep and confidence in the future.
There are such methods of insurance of currency risks as currency clauses, using a basket of currencies, resorting to the services of insurance companies and conducting transactions using the forward conditions. Each of these methods has both its advantages and disadvantages.
Currency clauses are special clauses of a foreign economic contract stating that the contract amount may be revised depending on changes in the exchange rate in which the calculation will be made. The insurance of currency risks with the help of a reservation allows none of the participants in the transaction to receive an unexpected loss from a sharp jump in the exchange rate, but at the same time makes it impossible for them to receive excess profits if the exchange rate is in a favorable direction for them.
Using a basket of currencies means that the calculation will be made not in one currency, but in a combination of several currencies in predetermined proportions. As a rule, such a combination of currencies is selected, the individual elements of which have an inverse correlation between themselves, that is, an increase in the rate of one currency coincides with a decrease in the rate of the other. The most popular example is the use of the dollar and the euro: as a rule, a decline in the dollar is accompanied by an increase in the euro and vice versa. Insurance of currency risks by using a basket of currencies can have a good effect if the basket is chosen correctly, however, after the contract is completed, the seller will incur additional costs for converting all currencies, which must be taken into account when setting the price and planning profit from foreign trade operations.
Applying to the services of strass companies is used quite often, but at the same time it is one of the most expensive ways to save your money. As a rule, insurers take quite serious premiums for the fact that in the event of a sharp change in the exchange rate, they will compensate you for the amount of loss in the event of an insured event. But insurance of currency risks in this way is unreasonably expensive, although, due to its reliability, it is no less popular than other insurance methods.
Carrying out transactions using the “forward” conditions is the conclusion of contracts for the purchase of a particular currency in the future (usually six months later) at the rate fixed at the date of conclusion of the contract. This method is more likely not insurance of currency risks, but a kind of lottery, since it is not known in advance which direction the exchange rate will move, and it is possible to save your money and deprive you of profit. Thus, forward operations, although they are used quite often, are more likely to be an independent way of making a profit than insurance against exchange rate fluctuations.
In addition to insurance of currency risks , it is also necessary to think about such a thing as credit risk insurance in case the buyer cannot immediately pay the full amount of the contract and ask you for installments. In this case, you will have to turn to the services of special forfeiter firms that deal with the purchase of receivables at some discount.