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| No.3 June, 2012 |
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Western Union joins HKABA as National Sponsor |
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Doing business in a volatile market
Don't create foreign exchange risk, manage it
Written by David Greene, Senior Corporate Foreign Exchange Dealer, Western Union Business Solutions |
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The world of foreign exchange (FX) has altered significantly in recent times. Market movements that used to evolve during a period of years now take days, and this volatility has made risk management a top priority for businesses with international operations. Consider how the financial state of European countries such as Greece have affected currencies world wide, and it becomes clear how critical FX risk is for exporters.
Now more than ever, companies in a broad range of industries need strategic assistance from specialist resources to manage volatile currency markets, and the challenge of global payments and receivables.
Facing up to currency volatility
Companies are counting every cent at the moment, and focusing more and more on risk management strategies to avoid being hit by large swings in currency. Management has learnt that without a solid hedging strategy in place their bottom line is exposed to negative impact from the currency market.
Many of these businesses have never implemented a currency hedging strategy before, and can end up inadvertently increasing their risk exposure. Hedging is about managing risk, not creating it.
The realm of foreign exchange is complicated, and with a large portion of exporters/importers being small businesses not every company has spare resources they can dedicate to its management. The more successful businesses are the ones that develop and follow good hedging policies; they reduce risk, secure cash-flow certainty and are easily understood and executed by the business. Along with including an FX provider in the development of currency hedging policies, there are a few simple guidelines that businesses should keep in mind.
Price should not drive strategy
Firstly, a good strategy does not predict currency moves. It expects movement or volatility and then provides the business and the FX provider with clear instruction. Secondly, a good strategy aims for outcomes that are not necessarily price specific. And thirdly, it's important that strategies are flexible enough to respond to an ever changing market. What worked last quarter might not be applicable this quarter. These are areas where working with a good currency dealer can help a lot.
Also, it sounds obvious but before negotiating with your buyer you should determine what exchange rate you want to trade at, and then evaluate the outcome of that trade to refine your strategy moving forward.
If you're an exporter that anticipates to be paid for a sale in 90 days time and you haven't hedged that receivable, a ten cent upward shift in the AUD could eat into a significant chunk of your profit. In a situation like this, the smaller your profit margins for foreign sales the more of your sales you should hedge. Of course, this depends on the goals and budgets of each individual company, but it's a critical consideration for companies doing business internationally.
Adaptability is key
Returning to my opening point, flexibility is an important factor in today's economy. In a constantly fluctuating market place risk management strategies should be reviewed on a monthly or quarterly basis and refined to match shifts in currency. SMEs that take a proactive approach to their FX exposure are positioning themselves for a stronger bottom line.
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