How To Deal With Foreign Exchange Risk

In the financial market, foreign exchange and the risks associated with this are often a hot topic. Businesses and investors need to know that changes in the FX rate can affect the cash flow and profit margins of their company. The good news is that you can actually deal with the foreign exchange risk in a manageable way. To help you with this, we have put together some tips so keep reading if you’d like to find out more.

Analyse Your Business

The first step to dealing with foreign exchange risk is to analyse how your business operates and determine where the risk actually exists. To do this, you should take a look at your business’ operating cycle in order to figure out the sensitivity of your profit margins. You should identify where in your operating cycle you need to protect the most.

Do Some Calculations

Once you have analysed the risk in your foreign exchange, you should make sure to calculate your exposure to it. For this, you’ll want to cover both the confirmed risk that exists after a sale is completed and the unconfirmed risk that exists before the sale is finalized. When you have done this calculation, you’ll want to move onto the next step which involves hedging.

Hedge Your Risk

Hedging your risk involves locking in your FX rate by using special instruments. You might have heard a lot about hedging but have struggled to understand it because of how complicated it is. When you hedge your FX risk, you’re protecting it for a certain period of time. If you are struggling with this part of the process, you might want to think about getting some FX hedging advice from JCRA. Once you have locked in the FX rate you can move onto the next step.

Create A Policy

The next step in this process involves creating a policy for your FX and making sure that your company follows it. To do this, you’ll need to make sure that you establish procedures, the FX risk criteria and the mechanisms that you will use for your programme. Once you have done this, you can go ahead with implementing the policy across your company and hoping that it works.

Protect Your Working Capital

When you are hedging your FX risk, it is important that you don’t let it affect your working capital too much. Your bank might ask you for some security for the FX facility that you are using which will then come out of your operating line. The disadvantage of this is that it can end up with a lot less working capital which will affect your business. Make sure to find out if you can take advantage of a guarantee that will mean that you won’t need to lose any of your security from your operating line.

Summary

In finance, the foreign exchange risk is something which a lot of businesses need to think about carefully. The last thing that you want to do is negatively affect your working capital, putting your business at risk. Make sure to follow all of the steps that we have outlined in this article carefully if you want to deal with the risk properly. If you are struggling with going through this whole process you should think about getting the advice of a professional company who can help you to secure your risk and hedge properly. Don’t be afraid to lock in your risk as this can help your company be more secure in the long run.

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