What are some possible strategies that a firm can use to protect against exchange rate risk?

Answer 1

It really depends on the nature of your exposure. For instance, even if you lock in a rate on your contracts, a large shift in the rates can leave a customer unable to meet contract payments, so you lose anyway.

My experience has only been in exporting, and back in the early 90's a huge devaluation of the peso cost the company I sold for tens of thousands of dollars with our Mexican distributor (we had a fixed contract in US dollars, but because the peso dropped the way it did, the distributor was unable to make their payables for invoices prior to the drop, so to keep business going we had to settle those prior invoices and took a big loss.) As long as you are dealing internationally, you will have to assume some exchange rate risk.

For a better answer, you'll probably need to clarify your situation.

Answer 2

Depends on the exchanges you are looking at. You could pay with gold. You could lock in the rate in your contracts! Even if they change, you are covered by contract.

You could take out insurance - that will cost you.

Not too creative this morning. Sure this will add to your answers.

Answer 3

Depends if you are importing or exporting.
Buying currency is one way.