Whether it is revenue generated in foreign currency or the related costs and financing, exchange rate volatility may have major influence on the economic actors’ performance, financial stability and the predictability of their operation. Thus, failing to address exchange rate exposure can be a serious risk factor.
Foreign currency risk primarily emerges in the life of an undertaking when the costs and revenues incur - either partially or entirely - in different currencies, or - although generated in HUF - they are realised at the prevailing exchange rate of a given, different currency. Therefore, currency risk is a risk resulting from the exchange rate volatility of the different currencies, and thus it has an outstanding role in the management practices of export and import companies.
In the light of the above, all undertakings concerned should deploy foreign exchange risk coverage as an essential financial planning instrument. One of the most commonly used methods to achieve this is the so-called forward contract that enables the purchase or sale of a certain foreign currency at an exchange rate which is predefined at the time of the conclusion of the forward contract in parallel with the application of future settlement (typically within the time period of maximum one year). This method to cover for fluctuations of the exchange rate provides security because the margin of the transaction can be fixed against the possible undesirable exchange-rate fluctuations. By applying this method, the company and the commercial bank can agree upon the details of a future conversion already in the present, such as the currency rate, the currency pair, the settlement day (fulfilment day), the direction of the conversion (purchase or sale) and the amount.