Clear Currency explores how foreign currency exchange risk can impact your business’s finances and offers risk mitigation techniques you can deploy to shield from it.

Eastern Daily Press: The process of making international payments exposes your businesses to the dynamic foreign exchange marketThe process of making international payments exposes your businesses to the dynamic foreign exchange market (Image: Getty Images/iStockphoto)

The only certainty in the unpredictable foreign exchange market is uncertainty. That’s because this behemoth is sensitive to a multitude of political and economic variables, from interest rates and inflation levels to general elections – the outcomes of which are impossible to accurately predict.

For businesses with international payment requirements, this uncertainty manifests itself as foreign exchange risk: the potential for adverse exchange rate fluctuations to drive up the cost of sending money overseas, denting profits in the process.

What are the risks of foreign exchange?

The process of making international payments exposes your business to the dynamic foreign exchange market. Within this exchange rate vortex, the value of one currency against another is changing by the second under the influence of the variables that drive it.

Businesses that adopt a reactive approach to exchange rates simply cross their fingers and hope they move in their favour when the time comes to execute payments. This might pay off occasionally, but if the rate suddenly dips in value – even by a small amount – you will be left cursing your luck and counting the cost.

This brings the need to mitigate foreign exchange risk into sharp focus for cross-border businesses – a proactive mindset that prevents adverse rate fluctuations from denting your bottom line.

Foreign exchange risk mitigation techniques

Timing is key in the struggle against currency risk. Therefore, you will want to execute your international payments when the foreign exchange market is at a favourable level. Hedging helps your business take control of its international payments by allowing you to lock in future exchange rates. This ability to mitigate the impact of FX risk is achieved by deploying solutions that shield you against the volatility of exchange rates.

Adopting this proactive approach to currency risk management will protect the cost of your international payments against market movements now and in the future. To achieve this, your hedging strategy must blend relevant solutions including:

Forward contract – This allows you to lock in a currency exchange rate and create a contract to carry on using that rate for a specific period – from one week to a year – so you can secure the cost of your international payments when the time comes to execute them. An international payment specialist like Clear Currency will assign you a dedicated account manager who can work with you to execute a forward contract that augments your risk management strategy and can help you understand how to mitigate foreign exchange risk using other solutions.

Limit Order – This allows you to target an exchange rate above the current market level. If the market reaches that level (of which there is no guarantee), you will secure your required rate and maximise the return on your foreign exchange transactions. This type of contract is useful if you need to make an international payment but are not restricted by tight deadlines.

Stop Loss Order – This allows you to set the minimum exchange rate that you are comfortable with your international payment being executed at. If the rate falls to this level, your payment will be executed automatically – shielding you against adverse exchange rate fluctuations that could detract from your costed levels or targeted hedging levels.

Manage your foreign exchange risk with Clear Currency

There’s no one-size-fits-all approach to executing foreign exchange risk mitigation strategies to guard your profit margins from currency risk. Therefore, a bespoke hedging strategy that considers your requirements, commercial context, and risk appetite will leave your business well-placed to execute effective solutions that match its unique goals. The amount your business hedges its position depends on the level of risk it’s exposed to and seeking protection from.

Clear Currency can help you to plan, execute and monitor a bespoke hedging strategy that’s tailored to your business’s unique requirements and risk appetite.

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