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In Focus: Three benefits of a foreign exchange risk management policy

By HiFX   /     Jun 20, 2017  /     Global  /     , , , , ,

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.

To learn more about how to write an effective FX policy, register for our free CIMA webinar on 28th June.

 

As the world becomes more financially connected and more money flows through the foreign exchange markets, sharp movements in exchange rates are becoming more common. Some events that can create volatility are known in advance, such as central bank decisions, elections and referendums. Others, such as natural disasters, can come as a complete surprise. But whatever the cause, these currency fluctuations can have a significant impact on businesses with exposure to foreign exchange.

The good news is, by establishing a robust foreign exchange risk management policy, your business can be prepared, whatever happens on the foreign exchange markets. We’ve taken a look at some of the benefits of an FX policy.

1. Don’t get caught out

When the markets are moving quickly, it is easy to get caught up in the emotions of fear or greed. However, this is when you may be most susceptible to making an expensive mistake and you may not get the best price.

The most effective time to plan your approach to foreign exchange is when the markets are calm and you can take the time to consider all the options available to you. This means you are prepared for any eventuality and you know what action is appropriate for your business during periods of unexpected volatility.

2. Be prepared if a key person is unavailable

Market volatility can happen at any time – such as the Flash Crash in October 2016, where the Pound dropped 6% against the Dollar in a matter of minutes with no obvious cause.

So while planning ahead is generally the best option, sometimes it becomes necessary to take immediate action. To prepare for such situations, it is helpful if a policy has already been agreed with a number of different people. This means if a key decision maker is unavailable at the time for any reason, there are other people who are able to take appropriate action.

3. Agree a strategic approach across the business

Boards can be unforgiving when an exchange rate drops by 10% but the risks weren’t hedged. But if exchange rates go the other way, a CFO may find they are being challenged on why they decided to hedge.

In situations like this, it can help if there is a foreign exchange risk policy that has been signed off by the Board that demonstrates the rationale behind why these decisions were made. It also provides a framework in which you can make strategic planning decisions, rather than falling into the trap of attempting to respond tactically to day-to-day developments.

Where do you begin?

The nature and detail of your policy will depend on how much risk your business faces, but there are some basics that all policies should cover.

First of all, you’ll need to understand what your business’ current exposure to foreign exchange risk is. For example, if your business imports €100,000 of European import goods, it isn’t exposed to €100,000 of risk, because the exchange rate isn’t going to fall to zero. So you just need to consider what levels of volatility seem likely. Furthermore, if your business is selling around €100,000 of goods to Euro, you already have some protection in place. You’ll need to focus on your net currency exposure across the business rather than any single element.

Once you have an understanding of your exposure, you can start to develop your foreign exchange risk policy. This will set out 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, either in assessing your exposure or developing your 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.

To learn more about how to write an effective FX policy, register for our free CIMA webinar on 28th June.

 

This communication is provided for corporate entities only. The details expressed in this transmission and accompanying documents are for information purposes only and are not intended as a solicitation for funds or a recommendation to trade. HiFX Europe Limited accepts no liability whatsoever for any loss or damages suffered through any act or omission taken as a result of reading or interpreting any of the above information. HiFX Europe Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, registration 462444, for the provision of payment services. HiFX Europe Limited is also a registered MSB with HM Revenue & Customs. Registration number: 12131222. HiFX is a limited company registered in England and Wales. Registered number: 3517451. Registered office: Maxis 1, Western Road, Bracknell, Berkshire, RG12 1RT

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