Companies that operate in the international trade or those that open in more than one country, are faced by additional risks and problems. One of the most common risks is the issue of foreign exchange. This is a risk that comes as a result of exposure to fluctuations of the foreign exchange rate. This risk can result in large losses for the business. It should therefore be every business aim to protect themselves from the currency exchange risk. To respond to this type of risk business should use hedging strategies. This can achieved using the various financial derivatives that are available in the financial world. This essay will discuss the factors that affect the foreign exchange and the various techniques and products that can be used in hedging against the foreign exchange risk. There are various methods that ABC Company can use so as to deal with the foreign currency risk that the company faces. This include: unheeded strategy, forward hedge strategy, money market hedge and option hedge. All this strategy has their own benefits and at the same time, they have their own shortcomings. Unheeded strategy is a technique in which the company might chose to ignore the foreign exchange risk and carry out business without minding the movements of the foreign exchange. Companies might ignore the currency risk and use the unhedged strategy because the hedging process is tedious and requires of a lot of technical knowledge which may not be available in small firms. The problem to this strategy is that it leaves a company exposed to currency risk. ABC Company projects that they will get 50 million euros from exports. This translates to 55 million dollars (50Ã-1.10) for the firm. This cash flows can however be affected by movements in the foreign exchange. Should the dollar depreciate $1.2 per euro, the firm stands to gain from the change since the company will receive $60 million (1.2Ã-50)? This will beneficial to the firm. However, the opposite might happen and thus the dollar appreciates. Supposing the dollar appreciates to a rate of $1.0 per euro, then the firm