Exchange Rate Risk Management

Exchange rate risk management involves strategies used by businesses to protect themselves from fluctuations in currency values. When companies operate internationally, changes in exchange rates can affect their profits and costs. For example, if a U.S. company sells products in Europe and the euro loses value against the dollar, the company's earnings in dollars will decrease. To manage this risk, businesses may use various tools like forward contracts, options, and swaps to lock in exchange rates or hedge against potential losses, ensuring more stable financial outcomes despite market volatility.