Significance of Forex Management

If I have to write significance of Forex management, I will write, "Forex management is important because with this, we can estimate Forex rate correctly and it is also helpful to control the risk of Forex.

Now, we go to detail of this. When we buy or sell any product from foreign country, Forex rate affects it deeply. For example, if Indian importer imports from USA, if USA dollar appreciate, the cost of importer will increase. All the businessmen whether they are doing the business of Forex or no, should manage Forex for reducing the risk.

Following are the points which explain the significance of Forex management:

1. For better Planning of Forex 

Whether you are doing the business or Forex or not, with Forex management, you can make better plan for Forex.  For example, if you see that supply of goods is from a country whose exchange rate will appreciate, you can make strategy to invest your money in that currency. You can take this decision on the basis of better understanding of Forex management.

2. For Creating Forex Reserve 

Forex management is significant for us because it teaches us to create Forex reserve at optimum amount instead of creating reserve in own currency. You just go to your own bank and deposit money is reserve in your own currency. But if you make FD in the foreign bank, it is your Forex reserve. As MNC, you should create multiple currency Forex reserve.

3. For Controlling the Risk of Forex 

When currency rate will change in Forex market, it may bring loss for you. Forex management can help for you to reduce this loss by providing your advance tool to control the risk of Forex. These tools are :

a) Forex future

Forex future is also called currency future. It means to contract of exchange of one currency to other currency. In this contract, we fix the future date. We just pay the purchase date price and buy it in the future date. In the future date if rate will increase, we will just pay past purchase date price. So, this will be helpful to reduce the risk of Forex because with this, buyer can lock current Forex rate for future date.

b) Forex Hedging 

Forex hedging means to do two opposite future contract. One contract is of buy the Forex and second contract is of selling Forex. You can read more detail of this at here.

c) Forex Swap 

Forex Swap is to buy and sell same amount of one currency for any other currency. It is also called currency swap. Currency Swap is an agreement between two parties of two countries for exchanging of principle and interest of loan at its present value. This swap is very useful for controlling foreign exchange risk. Read more this swap at here.

4. For Maximizing the Consolidated Earning of International Business

There are lots of big MNCs who does the business in more than 100 countries. All these countries foreign exchange rate changes day by day. So, with Forex Management, Forex manager make a solid Forex policy in which he does best for maximizing the consolidated earning of international business. For example, A company sells the goods to any country. If this currency will depreciated, company get more money from that country. But same time the salary cost will increase when it has to pay the salary to the employees who are working in that country. So, company's aim always should be to maximize the consolidated earning not earning from one country due to Forex change.

 Important : { This written lecture is the part of CS Accounting Notes}