Most companies are exposed to the day-to-day volatility of the FX rate (i.e. the FX risk). This volatility directly and indirectly affects the cash flow, revenue, expenses, and overall financial statement of companies.
If you do nothing
Only convert your foreign currency on the day of requirement, or within a day or two days of requirement. Unless your benchmark is the prevailing spot rate (see SPOT FX contract below), you will be exposed to daily FX volatility, which means you can be exposed to extreme movements in FX rates.
If you open a Foreign Currency Account (FCA / FCA-i)
To debit or credit a foreign currency account without converting to local currency as and when payments are due or receipts are receivable. This method is useful when your net exposure is negligible.
If you cover or hedge your FX risk
Typically a Forward FX contract is used to hedge your FX exposure. Types of Forward FX contract used include an Outright Forward FX contract, an FX Option (or a Customised FX Forward) contract, and other derivatives. All FX contracts are agreements (obligations by both parties) to exchange a specified amount of one currency for another currency, as determined by the Forward FX rate/s for settlement on a pre-determined future (or forward) date, according to the terms of each contract.