Managing currency risk involves several strategies, including:
Hedging: Companies can use financial instruments such as forward contracts, options, and futures to lock in exchange rates for future transactions, thereby mitigating the risk of unfavorable currency movements. Natural Hedging: This involves matching currency cash flows. For example, if a company has revenues in Euros and expenses in Euros, the currency risk is naturally hedged. Diversification: By diversifying markets and currencies, companies can reduce their exposure to any single currency's volatility. Operational Strategies: Adjusting the location of production, sourcing, and sales to balance currency risk exposure.