The Definitive Guide to Business Finance: What smart managers do with the numbers, Second Edition

Coping with uncertainty

Clearly, exchange rate movements can lead to surprise gains and losses. For example, if you are dollar based and you sign a contract for €900,000 on the day that $1 = €0.90, you would expect to receive a cool one million dollars. But if the rate moved to $1 = €1.00 by the date you were paid, you would net only $900,000. There are four ways of dealing with this sort of situation:

• speculation

• netting

• matching

• hedging.

Do nothing – or speculate

You could just live with exchange rate uncertainty, hope that rates move in your favour, and juggle your cash flow by delaying or accelerating payments and receipts to try to take advantage of exchange-rate movements. However, unless you are a currency dealer this is not what you are ...