Financial policy in exports - Covering against currency risks

4 important questions on Financial policy in exports - Covering against currency risks

What is a clearing currency?

During sales negotiations it is often agreed that the currency in which payment is to be made will be the customer's or sometimes a third currency. It is important that the clearing currency is a convertible currency (a currency which can be bought and sold at any time).

What is the most effective way of covering (hedging) a currency risk?

The purchase of a forward currency contract.

What is a forward market?

Market where dealers agree to deliver currency, commodities, or financial instruments at a fixed price at a specified future date. Most forward contracts are made for delivery at specific future dates, for example, one week from the transaction date, one month, and so on. Longer term contracts are more speculative in nature, and are substantially more risky.
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What does the exchange rate clause specify?

It specifies the exchange rate at which the value of the contract has been calculated.

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