The ever-present risk in every international transaction that a change in the exchange rate will occur before the transaction is completed. It should be evident that any such change will either injure or profit one party in any import-export operation. How may this problem be met?
1. The foreign trader, whether importer or exporter, may try to keep all transactions in his own currency, thus throwing the exchange risk onto the other party.
2. To the extent that his future payments or future receipts are expressed in foreign currencies, the foreign trader may:
A. Cover the risk of fluctuating exchanges by entering a futures contract for the purchase or sale of exchange at a stated rate.
B. Sell the foreign exchange to a bank at the rate of the day for the particular currency.
C. Do nothing, thus taking an open or speculative position in foreign exchange.
D. Depend on some other means of protection.
These, then, are in summary the major financial problems of the foreign trader: credit analysis, terms of sale, credit arrangement, and exchange risk. The previous two chapters have described the foreign exchange facilities and instruments available to the trader. Turn now to a more elaborate examination of the ways in which present-day exporters and importers use these facilities and instruments to solve those financial problems.
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