Indexation Clauses

Yet another technique of hedging risk is to provide clause (s) related to the export and import of goods and services between the  two parties in contracts agreements. Obviously, the terms and conditions included in the contract depend on the bargaining   strengths of the parties involved For For For For Instance, the exporter may be in a better bargaining position (on account of selling new  technology  or essential products like petroleum) to include a clause in a contract whereby prices are to be adjusted in such a  manner that the adverse movement of foreign exchange rates IS to be absorbed  by the importer alone In other words, prices are  adjusted to take care of foreign exchange loss so that the exporter receives virtually the same amount in local currency  in such  situations, the  incidence of exchange rate loss is to be borne completely by the importer.

In contrast, if the buyer importer happens to be in a strong bargaining position (as he is buying a competitive product having  high   rice elasticity)  he may succeed in pursuing the exporter 10 have a clause whereby prices are to be adjusted ‘downwards to  absorb losses due to unfavorable  movement of exchange rates the home currency depreciates or the currency of the  exporting  country appreciates)  In such a situation, the foreign exchange risk is borne completely by the  exporter. Such clauses  re ‘extreme’ in nature the indexation clause may be mild in nature stating  changes in exchange e rates  beyond which prices are to   e adjusted (say above’) per cent).

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