Question

Describe the commonly used techniques to hedge payables and receivables.

Answer 1

Payables anf Receivables in another currency other than ath home currency are subject to exchange rate fluctuation risks.

To hedge against that risk, the following techniques are used:

1.Forward rate: Under this technique, exchnage rate is fixed for the future in advance. On the future date, currencies can be exchnaged at the pre decided rate, irrespective of the Spot rate on that date, This contract is entered with the Bank.

2.Futures Contract: This is a hedging technique which takes place through stock exchange, Under this technique, future rate is fixed by the party and on the net settlement date, the difference between Spot Rate and Futures Rate becomes the profit/loss of tge investor and he can buy the currency at the spot rate. the effective exchnage rate will be equal to the futurs rate fixed in the beginning.