ANSWER

1)

The four most commonly employed proactive policies are:

• Matching currency cash flows -Matching currency flow means matching cash outflows and inflows with the same currency, such as doing as much business as possible in one currency, including borrowings. Currency swaps allow two companies to effectively borrow each other's currencies for a period of time.
• Risk-sharing agreements.-In the face of increasing scrutiny, payers have engaged in agreements, termed “risk sharing,” in which the risk is shared by both the payer, which agrees to pay reimbursement costs for the product despite uncertainties about its clinical or health economic value, and by the drug manufacturer, which typically agrees to make a financial- or outcomes-related concession depending on the future performance of the product.
• Back-to-back or parallel loans -A Back-to-back loan is a loan agreement between entities in two countries in which the currencies remain separate but the maturity dates remain fixed. The gross interest rates of the loan are separate as well and are set on the basis of the commercial rates in place when the agreement is signed
• Currency swaps -A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of interest – and sometimes of principal – in one currency for the same in another currency. Interest payments are exchanged at fixed dates through the life of the contract. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet.

2)

Normally, when a company needs access to money in another currency it trades for it on the currency market. But because the value of some currencies can fluctuate widely, a company can unexpectedly wind up paying far more for a given currency than it had expected to pay. Companies with operations abroad may seek to reduce this risk with a back-to-back loan.

The benefits of back-to-back loans include hedging in the exact currencies needed. Only major currencies trade in the futures markets or have enough liquidity in the cash markets to facilitate efficient trade. Back-to-back loans most commonly involve currencies that are either unstable or trade with low liquidity. High volatility in such trading creates greater need among companies in those countries to mitigate their currency risk.

One example would be an American company wishing to open a European office and a European company wishing to open an American office. The American company may lend the European company $1 million for initial leasing and other costs. This loan is calculated in U.S. dollars. Simultaneously, the European company lends the American company the equivalent of $1 million in euros at the current exchange rate to help with its leasing and other costs. Because both loans are made in the local currencies, there is no currency risk (the risk that the exchange rates between two currencies will swing widely) when the loans are paid back.