Reference no: EM132902916

1. With the increase in the globalization, lack of finance office does not deny opportunity for the small business engage in the international businesses. This is because there are various ways through which small businesses can participate in the international trade while at the same time take precautionary measures for the protection against exchange rates risks. First, business can create website through which they can list the products that they are selling and the associated and establish potential market which they can advertise using social media marketing and advertising tools (Madura, 2018). Importers can locate products on the website of the companies, place orders and the small business can organize for the shipment of the products to the customers. Second, small companies can use established firm such as Amazon which allows listing and selling of the products from other companies. Therefore, small businesses can approach Amazon, one their accounts with Amazon, have goods listed on the Amazon Website and when order is placed and sale is made on the Amazon, small business can either deliver or use distribution channels of the Amazon to have goods delivered to the customers. Finally, small businesses can enter international trade through the joint venture. Through joint venture, small business joins with other small firms in other countries which they have comparative advantage (Madura, 2018).

Small businesses can use several strategies to protect themselves from exchange rate risk. First, spot market is most common strategy which they can use where transaction is completed immediately. With the use of the spot market exchange rate, customers pay immediately eliminating possibility of the variations in the exchange rate that would occur in future if the goods would be sold on credit. Second, small can hedge for the exchange rate risk through use of the derivative which business can transfer the risk to the customers especially where customers would like to buy goods on credit.

2. There are several ways smaller businesses without an entire finance office can do to both engage in international trade and protect themselves from adverse movements in the exchange rate. In order to protect themselves against foreign exchange risks they can use hedging methods by using derivatives such as forward contracts, futures contracts, currency options, foreign exchange swaps and currency swaps.

A contract that is implemented among two parties, with one agreeing to buy and another agreeing to sell a fixed amount of the certain currency at a detailed future date and at a definite exchange rate. So, these trades involve the purchase and sale of a currency for future delivery on the basis of exchange rates that are agreed to today. These contracts are used to lock in the currency exchange rate on that day.

A floating-to-floating currency swap will have interest payments in floating rates for both parties, but in different currencies. In a fixed-to-floating currency swap, one flow of interest payments will be at a fixed rate, while the other will be at a floating rate. A currency swap is a foreign exchange deal that involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Currency swaps can either be liability swaps or asset swaps. Liability in one currency is converted to another currency to address the currency exchange rate risk.