Do You Know Your Business’s Foreign Exchange Risks?
The first step to reducing your organization’s FX risk is knowing your exposures, where they come from, and how they can impact your business.
May 27, 2020 — 4 min read
Every business that deals with international currency has foreign exchange risk, but every organization will face a different set of issues and risk factors, depending on their operations.
The first step to building a strong FX risk management program and reducing your organization’s foreign exchange risk is knowing:
What your exposures are,
Where they come from, and
How they can impact your business.
Many businesses around the world drastically underestimate their foreign exchange risk level, and are unaware of many of their greatest exposures. In this next installment of our series on FX risk management for businesses, we want to take you through the steps of assessing and determining your business’s foreign exchange risks. From there, you’ll be primed to take the next step of formulating your risk management strategy.
Where does foreign exchange risk come from?
There are many ways currency market exposure and foreign exchange risk can present themselves to your organization.
Some of the most common causes of foreign exchange risk include:
Importing. Does your business import any products or materials from overseas? If fluctuations in the market cause the value of your country’s currency to drop, then your organization’s importing costs could see a drastic increase.
Exporting. On the other hand, if your business sells goods and services to other countries, think about what market volatility could do for your prices. If your country’s currency increases in value, your business might not be as competitive in your market.
**Balance sheet risk. **If your organization has any subsidiaries or entities overseas that take care of some day-to-day operations, the value of their operations could change when the currency exchange rates do.
These are just a few examples of common causes of foreign exchange risk. Your business’s specific foreign exchange risk exposures will depend on what you do in your day-to-day operations and how you handle international currencies.
How do you know if your business has foreign exchange risk?
Identifying potential sources of risk is the first step. Once you’ve examined how your business deals with international currencies and whether your operations have any risk factors, you’ll need to assess the size of the risk and its potential impact.
There are three areas you’ll want to focus on:
Potential volatility. The markets are constantly moving, but global exchange rates can only move so far. Consider what could realistically happen and how that would affect your business, in order to get a better idea of your true exposure.
Net impact. Volatility could have a negative effect on your business, but your business could also see an increase in revenue from certain market fluctuations. Don’t just consider one element of the risk: look at the bigger picture.
**Time. **How far ahead have you planned? And on the other hand, how far ahead can you realistically plan while still making accurate, useful assessments?
How can you combat foreign exchange risk?
If some of these questions are making you feel overwhelmed, don’t worry. You’re not the only one who feels this way. Many businesses of all sizes around the world have found that they don’t have the expertise, time, or resources to fully assess their currency risk exposure and create a comprehensive risk management strategy that can fully address their risk profile.
A foreign exchange specialist can give your organization the expert guidance that it needs to create a plan to combat your foreign exchange risk and minimize the impact of market motion. At Xe, we’ve spent more than 25 years in the global currency markets. We understand foreign exchange risk, and we want to help you and your business do the same.
Over 13,000 businesses each year lean on us for expert guidance and support in assessing and combating foreign exchange risk. Are you ready to manage your risk Visit our Business page for more information about our offerings and to take the first steps in enhancing your organization’s foreign exchange risk management.