Managing your FX risk

Tips for handling the heightened risk exposure in the global marketplace

February 26, 2018
by Dave Dominy

From the February 2018 print edition

Dave Dominy is CEO of Firma Foreign Exchange.

Procurement and supply chain professionals are no strangers to risk. From changing trade tariffs, to unexpected changes in transportation costs, disruptions from extreme weather and political instability, any number of outside forces can wreak havoc on your flow of goods. Fluctuating exchange rates are another risk factor that must be considered. And while global currencies have always moved, the fact that we are now so closely linked to the global marketplace has heightened our exposure to their movements.

Without a currency plan or the in-house expertise to manage the risk of fluctuating exchange rates and the resulting complexity of international payments, smaller companies can be very susceptible to their potential negative impact on profit margins. The key is knowing that there are a number of strategies available to manage this risk and experts who can execute a plan designed for your business.

Currency market movements
A good start is having a topline understanding of what drives currency markets. Typically, these can be summarized by eight key factors, including:

1. Political and economic conditions;
2. Rates of inflation or deflation;
3. Interest rates;
4. Monetary policies;
5. GDP;
6. Fiscal policies;
7. Commodity prices, particularly oil; and
8. Unemployment rates.

The inability to predict which of these factors will affect the currencies that matter to your deals can be scary. Even in early 2018, we’ve seen USD/CAD rates jump by over 200 points in five minutes. A specialized foreign exchange firm can keep you informed about as many potential influences as possible, so you can plan for risks outside of your control and protect future deals against unexpected fluctuations.

Hedge against budget and pricing uncertainty
When negotiating international contracts or signing deals that have foreign exchange elements, it’s valuable to identify your exposure to currency market fluctuations. This will help you develop a plan to minimize, and in some cases eradicate, any risk to the profitability of your purchases or contracts.
One option is to use forward contracts. This currency solution allows you to lock in a predetermined exchange rate the day you sign a contract and for a set period of time, ensuring you know the exact exchange rate you’ll receive when it comes time to make or receive a payment. For example, you might not know that the Canadian jobs report is expected in the next couple of weeks, and you’re unaware of the fluctuations in USD/CAD exchange rates this might cause. A forward contract will enable you to lock in an exchange rate for a business deal you are conducting at the time indicated in the contract. This way, you will be protected against any potential unknown movement of the currency for the duration of your contract, protecting your profits.

While the downside of establishing a forward contract means that you might not be able to take advantage of market highs, the certainty of knowing your exchange rate in advance, can be critical in maintaining profitability.

Explore payment options
In addition to helping you establish a plan to manage currency risk, currency specialists can also ensure your international payments are transferred to and from your bank accounts quickly and cost effectively. Perhaps you have a list of international vendors from whom you regularly purchase supplies. If your business is sending a wire transfer to each of those vendors every month, you could be spending a significant amount of money on fees. A currency specialist might be able to help you save money by using another, more cost-effective form of electronic fund transfer, using their access to international banking networks.

Missed or late payments can also cause costly delays. Most foreign exchange providers can quickly and easily provide transfer confirmations—regardless of the financial vehicle used to send the money. That means your vendor can rest assured that your payment is on its way and won’t hold up your schedules.
Understanding the various factors that influence currency markets can have a big impact on your business, and working with someone who understands this and can ensure payments are sent and received quickly and cost effectively, means you’re not managing this risk on your own. Currency is complicated, but the solutions to manage your risk don’t have to be.

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