An entity dealing in the international market may purchase or sell goods to foreign entities due to which it is exposed to foreign exchange risk. Foreign exchange risk is a change in the cash inflow or cash outflow due to change in the exchange rate. This risk arises because a transaction may be entered into and settled at two different rates. However, it can be managed through the use of derivatives. Forward contract is one such derivative used extensively by the entities to manage the risk.

An entity dealing in the international market may purchase or sell goods to foreign entities due to which it is exposed to foreign exchange risk. Foreign exchange risk is a change in the cash inflow or cash outflow due to change in the exchange rate. This risk arises because a transaction may be entered into and settled at two different rates. However, it can be managed through the use of derivatives. Forward contract is one such derivative used extensively by the entities to manage the risk.

The marketing department of a newly set up software company was celebrating the occasion of bagging a lucrative export order. The news spread in the company and it reached the Finance Dept., as well. The CFO called the newly recruited, intelligent young finance executive to his cabin. The company had recently downsized its staff and the finance executive was shouldering the additional responsibility of the accounts as well. The CFO broke the news of the export order and asked about his opinion. The finance executive pondered for a while but was smart enough to understand its implications.

The Accounting World Magazine, Forward Contracts, Marketing Department, Institute of Chartered Accountants of India, Foreign Exchange Transactions, Global Accounting Practices, International Financial Reporting Standards, Foreign Currency Transactions, Financial Planning, Foreign Exchange Rates, International Accounting Standards, Business Environment.