External Techniques of Exposure Management

External techniques of exposure management resort to contractual relationships outside of a group of companies in order to reduce the risk of foreign exchange losses. External techniques include forward exchange contracts, Short-term borrowings, financial future contracts, currency options, discounting bills receivable factoring receivables, currency overdrafts, currency SWAP’s and government exchange risk guaranties.

Forward Markets

A forward foreign exchange contract is an agreement between two parties to exchange one currency for another at some future date. The rate at which the exchange is to be made, the delivery date, and the amounts involved are fixed at the time of the agreement.

This may be used to cover receivables and payables, but also enables a company or high net worth individual to speculate on foreign currency movements.

Forward markets are available for periods beyond 5 years for such currencies as USD, Sterling, DEM, Francs, Yen, Canadian dollars and so on. 10 year forwards are quoted by a few banks for many of the above.

The forward market may be used to cover a receipt and payment denominated in a foreign currency when the date of receipt for payment is known. But it can be readily adopted to allow for situations when the exact payment date is not known.