5_ top_ tips_ on_ how_ to_ combat_ foreign_ currency_ exposure
Foreign exchange payments and risk management specialist, Smart Currency Business, take us through key issues that their clients face when managing their currency risk, and the steps they could take to combat them:
- Avoid using the currency market to make decisions
The currency markets can be volatile at best, especially given the current climate. With political and economic events unfolding all of the time, the markets change quickly and can differ from one hour to the next. It’s therefore tempting for many of our clients to let a market view drive their decision making.
For example, when the pound is weak, as it has been recently, our clients may hold off from putting a hedging strategy in place, hoping that the markets will move in their favour. No-one can predict how the markets will move from one day to the next, so using this to drive decisions can be risky at best. We recommend speaking to one of our experts about putting a reliable strategy in place, which will offer increased certainty.
2. Know the full extent of your currency exposure
It’s also important that our clients are fully aware of the extent of their foreign exchange exposure. Surprisingly, key figures in a business, such as board members and directors, are often unaware of this, and it’s a common misconception that only the finance team should deal with the firm’s financial risk management strategy.
However, key figures in your business should have the knowledge to challenge and drive decisions when it comes to currency exposure. Your financial risk management strategy can then effectively contribute to the company’s overall success.
3. Keep your hedging strategy simple
When putting complex derivatives into place, the risk is often greater than the reward. Therefore, it’s better to keep things simple. The simpler the hedge, the easier it will be to revalue, which is key to knowing your overall position and assessing your risk. Complex trades are also more difficult and costly to exit, pre-deliver or extend.
4. Create a clear risk management policy
A clear policy will help you define your approach to risk management. Without this, actions may not be implemented or measured effectively. A good policy will include authorities and responsibilities, strategic objectives, as well as an outline of how risk is measured and managed. As part of your policy, your strategy should be closely aligned with your business goals to ensure a clear direction.
5. Get to grips with all hedging solutions available
The many hedging instruments at your disposal can be overwhelming and confusing, even to those familiar with basic hedging tools.
At Smart Currency Business, we take the time to fully understand the requirements of your company, and then put together a tailored risk management strategy to suit your needs. You can then learn about all of the hedging solutions available, and give yourself an understanding of what will work for your company.
If you would like to know more about how important currency risk management can be to businesses, then please download Smart’s latest Quarterly Forecast. It also includes rate predictions from major banks, as well as key events to look out for in the coming months.