Multinational Corporations

Firms engaged in importing and exporting conduct forex transactions to pay for goods and services. Consider the example of a German solar panel producer that imports American components and sells its finished products in China. After the final sale is made, the Chinese yuan the producer received must be converted back to euros. The German firm must then exchange euros for dollars to purchase more American components.

Companies trade forex to hedge the risk associated with foreign currency translations. The same German firm might purchase American dollars in the spot market, or enter into a currency swap agreement to obtain dollars in advance of purchasing components from the American company in order to reduce foreign currency exposure risk.

Additionally, hedging against currency risk can add a level of safety to offshore investments.

Similar Posts

  • The Bottom Line

    There is a reason why forex is the largest market in the world: It empowers everyone from central banks to retail investors to potentially see profits from currency fluctuations related to the global economy. There are various strategies that can be used to trade and hedge currencies, such as the carry trade, which highlights how forex players impact…

  • Investment Managers and Hedge Funds

    Portfolio managers, pooled funds and hedge funds make up the second-biggest collection of players in the forex market next to banks and central banks. Investment managers trade currencies for large accounts such as pension funds, foundations, and endowments. An investment manager with an international portfolio will have to purchase and sell currencies to trade foreign securities. Investment managers may also make speculative forex…

  • How Forex Trading Shapes Business

    The resulting collaboration of the different types of forex traders is a highly liquid, global market that impacts business around the world. Exchange rate movements are a factor in inflation, global corporate earnings and the balance of payments account for each country. For instance, the popular currency carry trade strategy highlights how market participants influence exchange rates that, in turn, have spillover…

  • Individual Investors

    The volume of forex trades made by retail investors is extremely low compared to financial institutions and companies. However, it is growing rapidly in popularity. Retail investors base currency trades on a combination of fundamentals (i.e., interest rate parity, inflation rates, and monetary policy expectations) and technical factors (i.e., support, resistance, technical indicators, price patterns).