Foreign exchange exposure management: A systematic approach

With the wide spread of globalization and liberalization, no business unit is being spared of dangerous effects of internationalization. As a result of it, every company whether or not engaged in any international business activity is exposed to some or the other foreign exchange risk. The foreign exchange risk may be transaction exposure, translation exposure or economic exposure. The high volatility of exchange rates imposes a big challenge for management of foreign exchange exposure. Success of a business firm largely depends on how effectively it manages foreign exchange risk. Foreign exchange risk management must be conducted in the context of a comprehensive business plan. This article sets out step by step procedure that an MNC should follow in order to manage its foreign exchange exposure. The article lays emphasis on regular review of hedging strategies for the purpose of efficient exposure management.