Hello Everyone, Now, let me introduce some ways to avoid foreign currency risk:
First, Let's have a look at this case. In the case, It was said that the?GuiRenNiao (GRN)Garment Foreign Trading Company of China? signed a contract valued $5 million with Nick Garment Company of the US. The contract value will be paid in three months after the signature.?But the US dollars is getting weaker and weaker against RMB and this made GRN? suffer a loss of 1.188 million RMB.
In the following, I will help GRN to avoid the foreign currency risk in three ways;
The?GRN can sign a?three month forward exchange contract with a Chinese Bank to sell 5 million US dollars. Thus, even the exchange rate between US dollars and RMB would have been changed, GRN would not suffer any loss from the change.?
Borrow-Spot-invest (BSI)
GRN?can borrow in $5 million,?By doing so, the time risk can be eliminated. However, the foreign currency risk is still existing, but it can be avoided by Spot contract method. GRN can exchange the borrowed foreign currency in to local currency (RMB) through selling the $5 million borrowed?to a Bank and . This can eliminate both the risks caused by the fluctuation of?exchange rate. Finally, the expenses for eliminating the risks can be compensated by?investing the local currency in some other project.