Strategy of Forex Trading

deserves consideration is transferring short exposures, such as deferred payables, to the supplier. There is no exposure when dealing strictly in the home currency. From the standpoint of a U.S. company, if purchase orders can be denominated in U.S. dollars, the risk of the exposure automatically transfers to the supplier. This is one of the easiest methods of managing foreign currencies under online trade.
Of course, this type of hedging is not always the most desirable, even when it is available. The supplier may not be willing to assume the exposure; his tolerance for foreign exchange risk may be quite low. He may exact a heavy toll which exceeds the cost of hedging in the market. It is true that contract provisions can be added that allow for sharing the risk if the supplier is agreeable; however, exchange rate escalator clauses written into purchasing agreements by attorneys sometimes create even larger exposures than the foreign currency itself. Provisions dealing with foreign exchange must always be reviewed carefully in light of alternative hedging methods to see if they make sense.
There is another factor to be considered when transferring the exposure risk to the supplier. A few years ago, for example, a furniture manufacturer was contracting to buy an annual supply of lumber from a Canadian mill. During a corporate policy meeting, the company tried to get a handle on the resultant Canadian market link exposure. Various suggestions were tossed about. The majority present began leaning toward denominating the contract in U.S. dollars, thereby avoiding foreign exchange exposure altogether.
There were assurances that the supplier would agree; he was not in a position to object. At this point, however, one of the principals made a rather insightful observation:
"We know how to hedge," she said, "and we know how to do it right. (The supplier) has never hedged and doesn't understand it. If he tries, he may lose control of it, and get into deep financial straits. If he doesn't hedge, he may lose his shirt on the deal. Either way, we lose our supplier."
Transferring the risk to the supplier in this case would only serve to exchange transactional exposure for less manageable operating exposure. The decision was made to contract in Canadian dollars, and to develop a hedge program toward that end.

For Customer

By far the most common concept of transferring transactional exposure risk for U.S. companies, and by far the most risky, is to give it to the customer. The foreign exchange risk is transferred to the customer whenever catalogs and price sheets are sent overseas denominated in U.S. dollars. As far as foreign exchange problems go, caveat emptor! This method once worked. It still does, somewhat, but not as well as it used to. The international customer today doesn't have to buy American-or Japanese, German, or British for that matter. The bazaar is replete with competing products from every corner of the globe.
Today there seems always to be a competitor in the wings who has no difficulty supplying just the right product at just the right price in just the right currency.
Transferring risk to the customer accomplishes no more than trading visible (accounting) exposure for hidden (operating) exposure. Hidden long and short positions are easier to ignore, at least for a while, and thus always harder to get a handle on. Exporters ignore them at their peril. Accounting exposures disappear when sales are solely in U.S. dollars, but sometimes the markets tend to disappear right along behind them.