When buying products or managing a business overseas, it’s key to develop a foreign exchange risk strategy to ensure your plans are not affected by currency volatility.Â
If movements in the exchange rate are not managed effectively they can present a significant riskÂ impacting profit margins, cash flow and price competitiveness. With a typical customer potentially purchasing significant volumes of currency on an annual basis, even a modest movement of 1-2% in exchange rates can have a material impact on the price of goods and services, or an organisations financial performanceÂ (for example, annual volatility in GBP/USD has averaged 12.9 per cent. over the past 10 years).
Foreign exchange providersÂ can offer a currency risk management service via various products such as Spot trades, Forward Contracts, Limit Orders and Rate AlertsÂ that seeks to help individuals and corporate clientsÂ decide when, how much, and how far forward to buy currency.
What is a foreign exchange risk management strategy?
Essentially a foreign exchange strategy is a plan which
limits the risk posed by foreign exchange risk to currency transfer. If poorly
managed the foreign exchange risk has the potential to impact the cost of
purchase and affect the bottom line of the business involved.
Implementing a FX risk management strategy
A foreign exchange broker or bank can help you manage foreign exchange risk by proactively managing your requirement. Foreign exchange risk can be managed by fixing forward contract when the rate is high or when
your invoice is received. They can also be managed by receiving payment in different currencies and hedging the exchange rate when you are expecting significant payments from overseas businesses. Â
A foreign exchange risk strategy can also be implemented for individuals making one off significant purchase. These can include targeting superior rates with a limit order or fixing a foreign exchange rate when the currency
pair hits a 3-month high. Contracts such as these can be highly effective when relocating or purchasing a second home overseas.
FX Risk Management Strategy for Businesses
Foreign exchange risk management strategies are critical for businesses operate internationally especially if their costs or revenues are derived in foreign currencies.
Companies can implement foreign exchange strategies to minimise these risks. This might involve purchasing certain foreign exchange contracts to compensate for their liabilities and assets. Foreign exchange brokers most commonly offer forward contracts and options contracts to offset the liabilities and assets.Â
FX Risk Management Strategy for Individuals
Whilst typically an individual will only be managing a handful of foreign exchange requirements, similar products will be available.
These can be used to hedge FX risk for an overseas purchase, ensure money transferred is at a great rate and ensure your salary is not affected by foreign exchange movement.Â