Question

How can a CFO protect its company from market or foreign exchange risks? How would their decision making be influenced if they are trying to protect their organizations from these risks?

Answer 1

The best way to protect the company from FX risk is by start hedging the contracts

There are a whole variety of forwards, futures, options and derivatives swaps which can be analyzed to choose the most suitable one for the company

A lot of banks and other counter parties are readily available to cater to the needs

Their decision making is influenced by a lot of factors which are

1) liquidity of those contracts

2) Eventual impact on the bottom line

3) counter party risk

4) Optimal hedged portfolio

5) Rollover risk

After looking at these parameters, one can finally begin to understand what type of derivative would fit to minimize the FX exposure risk