Currency risk insurance: theory and practice

When doing foreign economic activities, many firms are forced to work with the currency values of other countries. This is the reason why firms are exposed to fluctuations in the price of a particular currency, which is changed as a result of the forces of supply and demand for it. In order to maximally protect themselves and their company from losses when changing the exchange rate, the directors of enterprises use currency risk insurance. Having insured its currency risk, an entrepreneur loses some share of the profit from committing an external economic operation, but gets a calm sleep and confidence in the future.
There are such methods of insurance of currency risks, as currency reservations, use of a basket of currencies, access to services of insurance companies and conducting operations using forward conditions. Each of these methods has its own advantages and disadvantages.
Currency clauses are special items of the external economic contract in which it is stated that the contract amount can be revised depending on the changes in the exchange rate of the currency in which the calculation will be carried out. 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 deprives them of the opportunity to receive super-profits if the exchange rate changes to their advantageous side.
Using a basket of currencies means that the calculation will not be in one currency, but a combination of several currencies in pre-specified proportions. As a rule, a combination of currencies is selected, the individual elements of which have an inverse correlation, that is, the appreciation 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, the decline in the dollar rate is accompanied by an increase in the euro exchange rate and vice versa. Insurance of currency risks through the use of a basket of currencies can give a good effect if the basket is matched correctly, but after the completion of the contract, the seller will incur additional costs for converting all currencies, which must be taken into account when setting the price and planning profits from the commission of an external economic transaction.
Appeal to the services of passion companies is used quite often, but at the same time is one of the most expensive ways to save your money. As a rule, insurers take quite serious bonuses for the fact that in the event of a sharp change in the exchange rate, they compensate you for the amount of loss in the event of an insured event. But the insurance of currency risks in this way is unjustifiably expensive, although, due to its reliability, it is no less popular than other ways of insurance.
Conducting transactions using forward terms is the conclusion of contracts for the purchase of a particular currency in the future (usually six months or later) at a rate fixed at the date of the contract. This method is rather not the insurance of currency risks, but a certain lottery, because it is not known beforehand which way the exchange rate will be shaken , and perhaps both saving your money and depriving you of profit. Thus, forward transactions, although they are used quite often, are rather an independent way of making a profit, rather than insurance against fluctuations in rates.

In addition to foreign exchange risk insurance , you should also think about such a case as credit risk insurance in case the buyer can not immediately pay the full amount of the contract and ask for your installments. In this case, you will have to turn to the services of special forfaiter firms, which are engaged in the purchase of a debit debt with some discount.