Welcome to In Focus, foreign exchange insight from HiFX to support businesses that send or receive international payments.
For more information about how businesses can mitigate the risks of foreign exchange exposure , download our new currency risk whitepaper.
In the current uncertain political and economic environment, where sharp movements in exchange rates are becoming more common, businesses with any foreign currency exposure may be wondering how they can be prepared for whatever happens next. A foreign exchange risk management policy can support with this, helping to determine what actions are appropriate during periods of unexpected volatility and providing a framework for making strategic planning decisions.
But before your business can start writing a foreign exchange risk management policy, you need to understand how much currency risk your business is exposed to.
Get a view across all teams
It can be challenging to get a view of foreign exchange exposure across different parts of a business, especially as organisations grow larger. Businesses departments that operate in silos may have little idea of how their own activities fit into the overall company exposure.
In the worst case scenarios, this can result in different parts of the business making decisions about transactions and risk management that don’t make sense in the context of the business as a whole. For example, a supply chain manager could be hedging the risk of higher import prices without knowing what revenue the sales department is expecting to book from overseas.
Develop a holistic solution
By talking to each area of the business, you can get a sense of the bigger picture and approach foreign exchange holistically. This could enable you to get a better deal and help you to manage risk more effectively.
For example, your business may import €100,000 of European goods each year. But if you are also selling around €50,000 of your output into the single currency area, your business already has some protection in place. A fall in Sterling would see your import costs increase, but could also provide a boost to your export revenues. So you might find it is more efficient for your business to focus on your net currency exposure rather than a single element of the risk.
Once you better understand every aspect of your business’ currency exposure, you’ll be able to start implementing the right processes for managing your currency risk. And by involving different parts of the business in the process, you reduce the risk of any single function causing a problem.
You can now start to develop your foreign exchange risk management policy. This will set out the parameters for how much foreign exchange risk the business is willing to accept and over what time periods. It should detail what kind of hedging tools the business is prepared to use and who is authorised to make decisions. There should be considerations for different scenarios, such as if a key person leaves or is off sick.
If you’re not sure where to begin in assessing your exposure to currency risk or developing a foreign exchange risk policy, you may wish to consult a foreign exchange specialist such as HiFX.
For more information about how your business can mitigate the risks of foreign exchange exposure, download our new currency risk whitepaper.
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