Foreign exchange risk management

Foreign exchange risk arises from foreign currency fluctuation and influences this on the company’s operations, assets, and liabilities. This risk is derived from managed balance sheet exposures to foreign currency movement by matching asset and liability positions. There are three main types of foreign exchange risks that can affect the business financial results:

Currency transaction risk when a company conducts transactions in foreign currency.
Economic currency risk, when exchange rate fluctuations, can affect the future value of the company and its competitive positions in the short-medium and long term.
Translation risk or accounts exposure. Exchange rate fluctuations effect on financial statements of a company that does business internationally.

Risks associated with fluctuations in foreign exchange are regulated by the Company’s Foreign Exchange Risk Management Policy. This policy is developed according to the risk assessment and the company’s risk appetite. The company can decide on complete systematic hedging of foreign exchange risks.

No Hedging

No currency hedging activity.
Accept currency fluctuation, hope positive and negative effects will offset each other
Speculative attitude
Small and medium-size companies.

Selective Hedging

Hedging of specific (less frequent) transactions

Partial Hedging

Hedging of certain percent of activity abroad

Systematic Hedging

Obligatory hedging 100% of international operations.
Non speculative attitude.
Large-sized companies.

For currency risk mitigation, the company can use internal and external hedging solutions. Internal or natural hedging is the company reducing foreign currency flow by matching foreign exchange payables and receivables. The company’s external hedging solutions can use currency risk-sharing agreements or derivatives instruments such as forward, futures, options contracts, swaps, etc.