The globalization of the world economy and the devaluation of the U.S. dollar have allowed more American companies to enter the export market. Many managers, who previously avoided these markets, are finding that international transactions can make their companies more competitive in marketing products and procuring parts and materials. As new companies are exposed to foreign exchange risks, managers will be concerned with development of an effective hedging program.
There are a variety of hedging strategies available to assist managers in controlling foreign transactions risks. These include "pricing, settlement, forward contracts, leading and lagging, and netting" (Hill, International Business). In pricing strategies the exchange risk is eliminated if a company bills customers in the company's reporting currency. For example a company can negotiate a price for a receivable in its own reporting currency and shifts the exchange to other parties. In a settlement, companies cannot bill in the reporting currency, it can use the settlement strategy to help mitigate foreign exchange.
This requires management to offer discounts for early settlement of payables or receivable in foreign currency (FC). In this strategy companies relinquish the benefits of the time value of money in order to avoid the foreign exchange fluctuations.
For the forward contrast strategy a company does not wish to settle early and it cannot control the billing currency, it must use other techniques to control future cash flows. To be effective managers must assess the volatility of the applicable exchange rate and the expected trends. Larger, more centralized company's have options that employ to help control the foreign exchange issues of inner company transactions. This involves leading payments when the payer's currency is devaluing against the payment currency and lagging those payments if the payer's currency is appreciating. Netting inter company transfers is another common international cash management strategy...