The global economic environment is a highly dynamic one. With increase in trade the financial markets have grown across the globe. Trading and financing of trade therefore involves active participation by corporates in a highly volatile foreign exchange market. This being inevitable in todays context, an element of risk emanates as a natural off-shoot. Companies will therefore have to learn to `hedge effectively. This article examines the dynamics of the foreign exchange markets, the associated risks for a corporate, the relative merits and demerits of different popular methods of hedging and draws out an effective blueprint of strategies to cope with these risks.

Globalization has made cross-border trade and transactions a mandatory activity for corporates today. Conjunctively, the global financial markets have grown in size and structure making available several possible options to finance this trade. In this scenario, uncertainty necessarily increases and this can impose an unprecedented foreign exchange risk on an unassuming corporate. In such a dynamic and volatile environment, it becomes imperative for corporates to evolve techniques and strategies to manage the associated risks. Foreign exchange markets have their own rules of the game and any intervention for advantageous manipulation by interested parties may be of no consequence. Corporates will therefore have to evolve appropriate mechanisms. Alternatively, they can even try to take advantage of the opportunities that the market provides for optimizing cash flows. Managing foreign exchange risk is now a vital and challenging corporate function.

Before getting into the crux of the topic, let us first see how a foreign exchange market operates. All transactions in this market are transparent and there is little or no `inside information'. Exchange rate fluctuations are caused by actual monetary flows and more importantly the anticipations on global macroeconomic conditions. In principle movements in exchange rates are released publicly and so everyone in the world receives the same news at the same time.

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