This leads to transaction risk, translation risk, and economic risk as currency values change. Some ways that a company can hedge this risk are through vertical integration, long-term contracts, and futures contracts

One job of the financial manager is to manage the risks of both cash inflows and cash outflows. A forward contract is an agreement between two parties to make an exchange at a particular rate on a given date in the future.

option — an agreement that gives the owner the right, but not the obligation, to purchase or sell an asset at a specified price on some future date. forward contract — a contractual agreement between two parties to exchange a specified amount of assets on a specified future date. transaction risk — the risk that a change in exchange rates will impact the value of a business’s expected receipts or expenses. translation risk — the risk that a change in exchange rates will impact the value of items on a company’s financial statements.