Management of risk in foreign exchange:
A business enterprise may require imports and do exports also. Whenever this is done the invoice is in foreign currency. In imports the business enterprise requires foreign exchange while in exports it gets foreign exchange. There is a risk involved while doing imports or exports. The risk is that the exchange rate of the foreign currency in terms of Indian Rupees can keep changing. We will explain this through an example.
Example:
We have a US Dollar bill for 1000 receivable after a month. Presently the exchange rate is 1 US Dollar = Rs.48.25. By the time the money is received after a month, in case the rate is less than Rs. 48.25, we will lose money. On the contrary if the exchange rate is more than Rs. 48.25 we will gain. Exactly opposite will be the effect in the case of imports. The importer will pay less if the exchange rate decreases and more if the exchange rate increases. There are ways and means of minimising the risk of foreign exchange. Finance manager is expected to take care of such risks.
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