Crawl, Walk, Run: Taking the First Steps with Hedging
In this blog, we’ll talk about the necessary steps you must take to help mitigate the various risks your business is sure to face when dealing with foreign currency exchange.
As a financial professional you know that a sound FX risk management strategy is a must for organizations looking to succeed in a post-pandemic and post-Brexit economy. FX fluctuations are an everyday occurrence that needs to be addressed. In this blog, we’ll talk about the necessary steps you must take to help mitigate the various risks your business is sure to face when dealing with foreign currency exchange.
So what are these FX risks? Simply put, currency risk arises when your business transactions take place in a foreign currency. Not even global efforts by central banks to stabilize the economy can guarantee a static currency. This is why you need a personalized FX risk management strategy.
“In fact, having a risk management strategy in place will not only help with your company’s cash flow, liquidity and future market value, but also long-term strategic decisions with regards to future investments”
Here are tried and true steps that you need to take to begin implementing a successful FX risk management strategy that focuses on the process and not just the results:
1. Identify the nature of your risk exposures.
Assess where you have the most vulnerability when it comes to foreign exchange. Does your business engage in importing products or materials or are you selling products overseas? Costs from overseas goods that you purchase or sell don’t remain static and revenue cannot be guaranteed. A sudden drop in the exchange rate from the time of your quotation and payment of invoices in foreign currency can have a negative impact on costs. Balance sheet risk is also one you should consider especially if you have overseas operations or subsidiaries.
2. Develop a simple risk management policy.
It doesn’t have to be complicated. Look at the essential elements every policy should have. This could include how much FX risk your business can handle, who makes the decisions on FX risk, what tools you will use to mitigate risk and your long-term plan is and your process to manage currency risk regularly.
3. Specify your budgeted rates and goals.
As you look at your cash flow and other financial goals, it’s necessary to look at what the most comfortable rate is for your business. You should also review these goals regularly as part of your financial planning process. Embracing a new approach to managing your FX transactions can help you with your cash flow planning and securing an exchange rate for a defined period of time.
4. Select FX tools and products that best achieve your goals.
In March 2020, the British pound fell heavily against the US dollar in a span of a few days – a first in 35 years. Without an FX risk management strategy such as a forward contract in place, companies paying in US dollars would have seen a dramatic cost increase in amounts paid to their suppliers. Furthermore, if these companies are using traditional banks for their FX needs, they would have experienced delays or higher charges for the services aside from the not-so-competitive FX rates. Thus, knowing the right tool to implement can have such an enormous impact on your cash flow and revenue. Choosing the right FX partner who is knowledgeable on what products work best for your business is important in achieving your goal.
5. Execute your strategy.
As part of executing your FX risk strategy, take a closer look at the FX services your traditional bank provides. Perhaps it’s time for you to consider looking at other options. Although you may have a safe, trusted relationship with your banking provider, you may need to find a complimentary FX provider to help create a well-rounded strategy. A reliable and trusted moneycorp FX specialist can help you develop risk strategies that will be best for your business. They can offer tailor-made solutions based on the type of industry you are in and how they can help resolve your FX management pain points.
With execution also comes evaluations and adjustments to your strategy. It is after all a volatile market. You will need to look at current and future market conditions and adjust accordingly. Having a well-informed moneycorp FX specialist who understands the inner workings of the global currency market can offer not only the best advice when it comes to risk management but help implement customized strategies based on your financial requirements.