Do you think currency exchange rates are only a concern for bankers? No. Currency risks affect all international enterprises as well. Many organizations across the globe are exposed to currency risk, irrespective of whether they realise it or not. With the ongoing wild swings in economies, currency exchange rate risk is back on the agenda. So, let’s explore more about what currency exchange risk is and how to minimise it.
What is currency risk?
Otherwise known as exchange-rate risk, currency risk arises from the change in the price of one currency concerning the other. Enterprises or investors that have business operations or assets across cross-country borders are exposed to currency risk. The exchange rate risk typically creates unpredictable fluctuations in profits and losses.
Why managing currency risk is imperative?
As per a survey of HSBC conducted by 200 chief financial officers and about 300 treasurers, about 70% CFOs asserted that their company struggled with reduced ROI due to the unavoidable risk of currency exchange rates. Managing the currency risks can bring an extensive range of advantages for enterprises. Some of them are listed as follows:
- Enhanced borrowing capacity
- Improved understanding of how fluctuations in currencies influence business balance sheets
- Safeguarding cash flow and profit margins
- Improved budgeting and financial forecasting
The rule of thumb states that businesses try to avoid any potential losses when currency exchange rates fluctuate. Wondering what currency risks are and how to minimize them? Here are some tips for you.
Tips to Minimise business currency risk
Having a comprehensive idea of how and where currency fluctuations impact a company’s cash flow isn’t a cakewalk. Different macroeconomic trends and competitive behaviour within market segments define how currency rates tend to affect the cash flow of any business. To minimize cash flow, enterprises need to:
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Re-analyse your operating cycle
Review your company’s operating cycle to find out what FX risks exist in your financial system.
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Determine the rules that you want to apply to your currency exchange risk and stick to them
Understand the company’s financial objectives and draft an effective FX policy that outlines the operative cash outflows and inflows.
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Make peace with the fact that you have unique currency flows
Every business is unique and your currency flow affects that. Depending on the structure of your liabilities and assets, understand that currency fluctuations might have a certain impact on your funds.
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Handle your exposure to currency risk wisely
While the currencies are constantly appreciating and depreciating, determine the financial instruments that can help you mitigate uncertainties which may jeopardize the company’s financial objectives.
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Automate the process
Automate the process with the help of a renowned financial service provider.
Conclusion
There are three types of currency exchange risks: transaction exposure, economic or operating exposure and translation exposure. Dealing with currency exchange risks financial assistance and if you want you can also reach out to foreign exchange experts to help you glide through the FX process seamlessly. Irrespective of whether you are a budding business or an enterprise giant, don’t let your finances hold you back. Seek professional expertise and overcome FX risks like a pro.