It is possible to take steps to hedge foreign currency risk. This may be done through one or more of the following options:

i. Billing Foreign deals in Indian Rupee:

This insulates the Indian exporter from currency fluctuations. However, this may not be acceptable to the foreign buyer.

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Most of International trade transactions take place in one of the major foreign currencies: USD, Euro, Pound Sterling, and Yen.

ii. Forward contracts:

You agree to sell a fixed amount of foreign exchange (to convert this into your currency) at a future date, allowing for the risk that the buyer’s payment is late.

iii. Options:

You buy the right to sell the currency at an agreed rate within an agreed period. For example, if you expect to receive $35,000 in 3 months’ time, you could buy an option to convert $35,000 into your currency in 3-months. Options can be more expensive than a forward contract, but you don’t need to compulsorily use your option (e.g. if the currency movement is in your favor).

iv. Foreign currency bank accounts and foreign currency borrowing:

These may be appropriate where you have costs in the foreign currency or in a currency whose exchange rate is related to that currency.

In India pre-shipment and post-shipment credit can be availed in foreign currency at very competitive, Libor linked, rates. However, while taking a decision on availing credit in a particular currency, one has to be careful about the premium/discount factor of that currency and its expected movement in near future.

Post-shipment trade finance, a trader might just want to gain extra profit by benefiting from the premium factor on the currency in which he expects to receive his remittance in the future.