Mitigating Exchange Rate Risk
Mitigating Exchange Risk
MSMEs are exposed to many forms of risk in their course of business, such as interest rate risk, foreign exchange risk, and natural disasters. These could result in financial loss and minimize their profit. Since MSMEs work on tighter budgets than larger firms, and have weaker capital base, losses through exposure to various ...view middle of the document...
Foreign exchange risk in particular, impacts firms engaged in exporting, importing, and borrowing in foreign currency. Rupee appreciation benefits importers as it decreases rupee prices of imported goods and harms exporters as it increases foreign currency prices of exported goods. Rupee depreciation harms borrowers who take loans in foreign currencies that are cheaper than Indian loans. (Export)
Since currency fluctuations adversely impact MSMEs, they should determine their risk exposure to various currencies, as well as adopt risk mitigation strategies and methods.
• (Export)The currencies to which the firm is exposed to
• The extent of sales / purchases /receivables / payables denominated in foreign currencies
• The extent to which price fluctuations can be passed on to customers (by increasing price or by entering price variance clauses)
• Cash flow position of the firm and ability to withstand currency fluctuations
• Impact of currency fluctuation on overall profitability of the firm (Export)
Export. (n.d.). Retrieved August 31, 2013, from Small B: http://smallb.in/%20/exports%20/mitigating-exchange-rate-risk