THE USE OF FOREIGN CURRENCY FUTURES TO REDUCE EXCHANGE RATE RISK

Introduction In a world of increased uncertainty about the future value of exchange rates and increased visibility of foreign exchange gains and losses, it is not surprising that both commercial and financial firms have become more concerned about minimizing foreign exchange risks. Once a company becomes involved in international trade, be it the formation of a foreign subsidiary or simply the import or export of goods, it subsequently becomes subject to foreign exchange risk exposure. Foreign exchange risk exposure can be broken down into three categories for further development; these are real economic exposure, translation exposure, and transaction exposure.