Foreign Exchange Risk Management


When you’re doing business overseas, adverse foreign currency movements could wipe out your profits or worse. So isn’t it worth getting protection against foreign exchange risk? The most common cause of foreign exchange (FX) risk arises from:
– Making overseas payments for your imports that are priced in a foreign currency
– Receiving foreign currency for your exports.

For example, suppose you are importing $100,000 worth of stock from a supplier in other country in three months time. If you simply wait and buy your US dollars in three months when you need to make payment, you have no idea how much that stock will cost you in your local currency terms because of FX fluctuations.
Failing to protect against movements in foreign exchange rates effectively means buying or selling without having agreed a price in your currency. Can you afford to leave it to chance?
Exposure to foreign exchange risk can also arise from:
– Foreign currency borrowing or deposits
– Overseas subsidiaries
– Assets located overseas.

FX protection is an essential service for:
– Importers and exporters of goods and services
– Owners of overseas assets, joint ventures or partnerships
– Group companies and subsidiaries in more than one country.

FX Services & FX Protection:

1. Spot Foreign Exchange
– A binding obligation to buy or sell a certain amount of foreign currency at the current market rate, for settlement in 2 business days time.
– Most commonly used by companies exposed to transactional risk.

2. Forward Exchange Contract
– A simple method of covering exchange risk, without having to worry unfavaourable movements
– Overcomes the problems in budgetting as you can now budget at a pre-agreed rate of exchange

3. Currency Options
– Protect against adverse movements in foreign exchange rates
– Benefit should spot exchange rates move favourably
– Protect a budget exchange rate as you choose the rate under the option
– Give the holder of the option the right but not the obligation to buy or sell a specific amount of currency, at a specific rate of exchange, on or before a specific future date.

Should you need any FX Solutions, please do not hesitate to contact us!

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