Currency Risk Sharing Agreement
Suppose a hypothetical American company called PowerMax imports 10 turbines from a European company called EC for a price of 1 million euros each for a total asset of 10 million euros. Due to their long-standing business relationship, the two companies agree to a currency risk-sharing agreement. Payment by PowerMax is due in three months and the company agrees to pay EC at a cash price of 1 EUR = 1.30 USD in three months, which means that each turbine would cost $1.3 million, for a total commitment of $13 million. The foreign exchange risk sharing contract between EC and PowerMax provides that the price per turbine will be adjusted if the euro is traded below 1.25 or above 1.35. Hekimoglu, M., van der Laan, E., Dekker, R.: Markov modulated analysis of a spare parts system with random passage times and risks of failure. Eur. J. Opera. Res.
269 (3), 909-922 (2018) Currency risk sharing is a means of hedging foreign exchange risk in which both parties to a transaction or trade agree to participate in the risk associated with exchange rate fluctuations. If our adversary opposes and the subject were to become a stumbling blocks for a successful negotiation, there would be another way we could use to counter their protests. If they insist that we act in their currency, we could prevent the amount to be paid or received from being indexed or directly linked to the exchange rates between the two nations. So the ratio between currencies remains the same — which reduces the risk of large exchange rate fluctuations. The purchasing power parity of currencies would thwart the viability of this method in the face of a significant exchange rate change. The sharing of foreign exchange risks usually includes a legally binding price adjustment clause, which adjusts the base price of the transaction when the exchange rate varies beyond a given neutral band or area. Therefore, risk sharing is only carried out if the exchange rate is higher than the neutral band at the time of the transaction, in which case both parties share the profit or loss. The second method of „hedging“ is to acquire an option to sell and buy the foreign currency at a „fixed price“ in the partner`s currency for a defined period of time in the future.
This may include creating a foreign currency account or purchasing foreign currency bonds. While these revenues do not guarantee that we will not incur losses, there is much we can do to minimize our exposure.