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Exchange Rate Risk Protection in International Business

Published online by Cambridge University Press:  19 October 2009


Among the risks inherent in international business operations the exchange rate risk represents one of the important considerations for the managers of multinational firms. Three techniques are well known as effective methods against the erosion of value due to the exchange rate fluctuation. These are (1) use of a forward market, (2) use of monetary balance, and (3) use of foreign currency swap arrangements. While the use of a forward market represents an effective tool against the exchange rate loss in ordinary transactions, the other two are designed for different purposes. The use of monetary balance is a protective device against the erosion of the value of the assets due to the exchange rate fluctuation, whereas the foreign currency swap is a device primarily to protect the value of the investment in countries whose currencies are “soft” in that the likelihood devaluation is so high that forward markets do not even exist.

Research Article
Copyright © School of Business Administration, University of Washington 1975

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