1) Currency risk sharing and currency risk shifting:
Currency risk sharing refers to the practice of distributing or spreading the risk associated with fluctuations in exchange rates between two or more parties. This can be done through various financial instruments such as currency swaps, options, or futures contracts. By sharing the risk, the parties involved can mitigate the potential negative impact of currency fluctuations on their financial positions.
On the other hand, currency risk shifting refers to the act of transferring or shifting the risk of currency fluctuations from one party to another. This can be done through contractual agreements, such as including clauses that specify which party is responsible for bearing the currency risk. For example, in a sales contract, the buyer may agree to bear the currency risk, while the seller shifts the risk to the buyer.
2) Leading strategy and lagging strategy:
Leading strategy and lagging strategy are two approaches used by multinational companies to manage their foreign exchange exposure.
A leading strategy involves taking proactive measures to mitigate potential currency risks. For example, a company may choose to invoice its foreign customers in its home currency to avoid exposure to exchange rate fluctuations. By doing so, the company can maintain a stable revenue stream and reduce the uncertainty associated with currency movements.
On the other hand, a lagging strategy involves delaying or postponing the decision to convert foreign currency into the home currency. This strategy is based on the belief that exchange rates will move in a favorable direction over time. By waiting for a more favorable exchange rate, the company aims to maximize its foreign currency earnings when converting them into the home currency.
3) European terms quotation and American terms quotation:
European terms quotation, also known as direct quotation, is a method of quoting exchange rates where the domestic currency is expressed in terms of a fixed amount of foreign currency. For example, if the exchange rate between the US dollar and the euro is 1.2, it means that 1 euro is equivalent to 1.2 US dollars.
American terms quotation, also known as indirect quotation, is the opposite of European terms quotation. It expresses the exchange rate as a fixed amount of domestic currency per unit of foreign currency. Using the same example, an American terms quotation would state that 1 US dollar is equivalent to 0.83 euros.
These two quotation methods are commonly used in international finance to facilitate currency conversions and transactions. The choice between European terms and American terms depends on the convention followed in a particular country or market.