Currency Risk
When SALAM, an American company, makes its first foreign sale, a primary issue of concern is the currency exchange rate. Since SALAM is working on a very tight budget, losses can happen if the currency exchange rate changes during the three-month period between purchase and payment. Additionally, with concerns about the pound falling in the next three months, SALAM must make a decision quickly to ensure their profit margin is protected. SALAM has four possible options to avoid loss of profit. SALAM can either hedge in the forward market, hedge in the money market, hedge in the options market or choose to not hedge.
Remaining unhedged would mean that SALAM selected no further protection and simply waits for the three months to pass, accepting the exchange rate at the time of sale in three months. This option is always possible; however the company has intelligence suggesting that the pound will fail in the...
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