This piece is for new businesses, big and small, to help them understand forex management.
Businesses working in import/export will most certainly find themselves faced with the foreign exchange market and will have to willing or unwillingly participate.
The main trouble facing businesses: volatility
In a business there are innumerable factors and costs involved such as production, set up, clientele building, marketing, company identity, and dealing with competition.
For those who work in cross border trading, there is then the added uncertainty of foreign exchange. The whole business doesn’t have to be a trading one for businesses to get involved in that market.
Over 50% of the respondents to a Deloitte survey considered Forex volatility to be a major challenge in their business.
A lot of times it is a company with a product or service for which they need to import something, a part or an ingredient, that will force them to exchange (buy) currency and be exposed to forex market’s volatility.
Forex especially has a way of surprising the smaller companies that enter into it unwittingly not being fully aware of how much they can lose just by choosing the wrong time to make the exchange.
According to the changing political environment and the fluctuations in economies, the exchange rates change and this is what will make the difference between good fortune or misfortune for small businesses.
Market volatility affects businesses in the following ways:
- Through transaction exposure- which is the risk or volatility the business exposes itself too when making or receiving cross border payments.
- Through translation exposure- which is the risk the business’s consolidated financial statements are exposed to
- Through economic exposure- which is the risk that will affect the future cash flow of a business
So with so much risk involved, is there a way to avoid losing a lot of money? Yes.
Defining strategies and developing a system
A business, especially one that’s just starting out or beginning to get big, needs to set in place their payment strategies right off the bat. This is also called currency management.
For effective forex management a company is required to:
- Outline their forex needs
- What they hope to achieve from forex
- Relay all this information to a strong accounting team
Forex can help make up for currency shortages through spot trading, however for this a business will need to have a strategy in place that highlights risk margin and expected reward.
To make use of the forex market to the best of its potential, strategizing is key. And to develop a good strategy, the business will need to invest in a good finance and accounting team, preferably those who have a lot of experience with Forex.
Look into hedging if you haven’t already
One way to beat or minimize losses in the face of market volatility is to secure funds through a diverse set of investments. In forex trading a trader can hedge by holding both a short and long position on the same currency pair.
This is done for a number of reasons.
- To take advantage of smaller fluctuations while you’re holding a longer position.
- To protect an existing position, since you might lose some money for a time on it, but you’ll be making it back from the other position.
There are many ways to hedge in Forex and strategies that can be employed and those will be discussed in detail in another blog post.
There are ways to control risk in a market in which foreign exchange is becoming harder and harder to avoid, if there is enough research to back the strategy employed and a strong team to implement that strategy.