For any company involved in any kind of international trade, the issue of foreign exchange rates is sure to impact their business at some point. Whether it is due to being hit by sharp increases in supply costs thanks to the fall of the dollar, seeing a loss of consumer purchasing power in a valuable market because of a depreciating local currency, or dealing with significant price fluctuations in payment on a foreign currency loan — forex matters. So, when it comes to foreign currency exposure, what can businesses do to minimize risk and make the right decisions?
Assessing risk and reward
For any company interested in making better decisions in relation to forex, probably the first and most important step is to perform a thorough risk assessment of all business operations. Here, ideally, with the help of a business analyst who specializes in forex issues, the company will need to identify all areas of their business where currency fluctuation could impact how they work, either positively or negatively.
Once this has been accomplished, it is essential to set clear objectives on how to move forward and highlight the most important areas of concern. Simultaneously, the business will need to identify the best strategies to deal with these key areas to reduce risk without unduly impacting the effectiveness of the company.
To help manage forex risk, most companies will look to utilize some kind of hedging strategy. Currency options, for example, give the company the right to buy a currency at a set exchange rate in the future, but with no obligation to complete the purchase. This enables the company to offset the risk of a sharp increase in the value of a specific currency when trying to complete a major business transaction, for example.
Forward contracts can also be used to manage transaction risks. In this case, the value of the transaction is fixed at the exchange rate on the day the deal is confirmed. A swap contract, or limit order, is another common tool. Here, an importer will set the exchange rate with pre-arranged boundaries. If the exchange rate wavers from these limits, payment will be deferred until the price has returned to an acceptable level.
The right balance
The choice of strategy will depend greatly on the individual circumstances. In each case, the most important thing is to shape the strategy to the needs of the business and be flexible enough to change or adapt whenever appropriate. Of course, even though employing experienced forex experts is highly recommended, it is also a good idea for the company owners and directors to stay informed about the market dynamics in forex trading, and how it can impact their business.
Taking the time to examine the market and study live forex charts to learn the fundamentals of forex exposure will certainly pay off in the long run. The key is to know how to strike a balance — not locking down capital unnecessarily, yet also not leaving oneself open to undue risk. Rest assured, though, that learning more about managing forex and implementing smart solutions is always likely to lead to more positive results.