What strategies can an importer adopt to hedge against exchange rate risk?
For an importer the best time to import is when the local currency has appreciated with respect to the currency of the nation from which goods are being imported. A stronger local currency decreases the amount that has to be spent in terms of the local currency for importing any good at the same price in terms of the foreign currency.
To hedge against foreign exchange risk, a few things that an importer can do are the following:
- The importer should not rely on exporters from only one country to import everything. If exporters in many countries can offer the same product, the importer should diversify. This strategy can work out to the importer's advantage if the local currency depreciates with respect to the currency of only a few nations.
- The importer can use the forex market to buy currency futures when the local currency is strong. The expiry of the contracts bought should be close to when the importer is actually going to import the products. This would ensure that the importer can import at a low cost even if the local currency were to depreciate in the future.