If your business sells its products or services to international clients, or if you buy in supplies from overseas, then you will be well aware already of the threat of currency risk.
The uninitiated might be asking, what is currency risk? Well, in essence, this is where a change in the foreign exchange rate will impact upon your business negatively.
It can make your supply chain more expensive – for example, if a supplier charges more for its products/resources if its own export costs increase. And if you export to international countries, it can make your own profitability take a hit.
A change in currency can also see the value of your investments and assets depreciate, while also impacting the perceived profitability of your firm – not ideal when trying to attract international investors.
In theory, there’s little that can be done about currency risk – we have no control over the forex market. However, there are techniques that can be deployed that mitigate the risks of currency changes somewhat.
Invest in the majors
Remember, some currencies are more exposed to risk than others. The likes of USD, CHF and JPY are considered ‘safe havens’, and they tend to be used as stabilisers even in the event of global turmoil (i.e. a viral pandemic).
Consequently, the minor currencies and exotics are more greatly affected by volatility, so if you have suppliers, production or investments held in such countries, then you will need to consider risk management strategies.
By investing in forex majors, for example, you can hedge your risk. Should your host country currency take a dive in value, you have the backing that the safe-haven majors will at least hold their value if not increase in price during turmoil.
Those involved in corporate investments often recommend hedging risk by pumping available capital into more ‘reliable’ currencies.
Factor in the chaos
The truth is that not enough businesses are factoring currency risk into their planning and projections.
When making your plans at the start of a new financial or calendar year, make sure that your forecast prepares for the worst-case scenario – if COVID-19 has taught us anything, it’s that we never know what is around the corner.
Therefore, build currency risk into your projections, with negative changes to currency value built into your analysis. This way, you will have an understanding of what could befall your supply chain and investments – as we know, in the business world, proactivity is so much more effective than reactivity.
If you rely on overseas manufacturing and production to deliver your goods, then the chances are that you negotiate a contract in advance of order fulfilment.
This can mean that you agree to a price that is disadvantageous to your firm, costing you more than is necessary and eating into your profit margin.
That’s why many firms opt for a ‘forward contract’ instead. This is an agreement between the two parties that locks in the exchange rate that is available on the day that the deal is signed, rather than when the order is fulfilled.
This is a fantastic way of hedging risk, as you can calculate exactly what your outgoings are and thus your profit margin is maintained and consistent – ideal for forward planning.
Of course, you wouldn’t benefit from a favourable exchange rate change, but this is just the way the cookie crumbles!
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