Question

In your business, you export locally produces goods in EUROS and import some of your raw materials in JAPANESE YEN.

a) What are your risks?

b) What can you do to overcome your risk?

Answer 1

A) The risks involved are as follows :-

1. If Euros appreciate comparing to the home country, the profits will reduce as lesser will be required by the foreign country residents to buy more imported goods.

On the other hand if Japanese yen appreciate the the prices of the raw material will increase and thus the profits will decrease too.

B) These can be overcomed with following :-

1. Using derivatives future contracts - futures fix the price of a good to be bought or sold today for a specific quantity and a specific price thus fixing the profits. This reduces counter party risk too.

2. Foreign currency account - which pays and accepts payments in foreign currency

3. Currency Options - apart from derivates contracts on goods, currency options can be used too

I hope this helps

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