International Marketing Practices

Hedging Against Exchange Rate Fluctuations New opportunities have emerged from globalization, but so have risks, particularly for commodities like lumber and other forest products [205]. Commodity price and exchange rate variability affects virtually all participants in any business transaction [21, 206]. For this reason, many firms operating in commodity markets use hedging strategies to manage price volatility and foreign currency risk, often providing insurance against adverse fluctuations [23, 206]. Hedging typically works through the assistance of a third- party firm, such as a bank, to eliminate expected or unforeseen risks by using the forward foreign exchange market [23]. There are several ways for an exporter to hedge against exchange rate fluctuations that should be explored [207]. • Foreign bank account. By opening and using a foreign bank account, your firm can exchange currency when the rate is promising. • Currency forward contract. A currency forward contract locks in a price using the current exchange rate for a future transaction. • Futures contract. Similarly, a futures contract guarantees a price using an exchange rate agreed upon today, while also providing opportunities to sell the contract before the term is up if circumstances change. For example, a lumber producer can lock in prices for future sales by buying contracts traded in the Chicago Mercantile Exchange [208]. • Currency options. Banks provide opportunities for firms to buy or sell currency at a set price on or before a chosen rate expiration date.

Chapter Questions 1. How have you thought to finance your international operations? 2. What are potential sources of financing when you start exporting? 3. What is your budget to start your international operations?

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