The importance of considering your business objectives in order to manage your FX risk
In his second article for Business Advice, Andy Reid, managing director of global payments at moneycorp, looks at the importance of considering your business objectives in order to manage your foreign exchange (FX) risk.
In my previous article, I outlined the importance to first-time exporters of planning ahead and evaluating currency markets. Your foreign exchange policy should comply with and work towards your company’s overall business strategy and objectives.
For those businesses first starting out on their exporting endeavours, we would suggest putting together a strategy which takes into account your business and your foreign exchange needs, along with areas of potential risk within your export plan. Consulting a foreign exchange specialist could be useful, as you will be able to talk through any questions you may have, and get access to expert guidance on the markets and when to make a money transfer.
You may be able to minimise the risk of currency fluctuations by locking into a regular payment plan, so do some research into these options. For example, one of the payment options available for businesses is forward contracts, which enable you to lock into an exchange rate for a period of up to two years. With an exchange rate locked on a future payment, you can accurately plan your future budgets and stop worrying about unpredictable market rates.
Another payment option is market orders, which allow you to target an exchange rate not currently available on the market. Market orders are used if you don’t need to make a payment immediately and you think the market rates for a currency could improve in your favour. You can automatically exchange at more competitive rates without having to watch the markets.
Regardless of what payment option you choose, using a specialist foreign exchange service is far cheaper than using a bank and the exchange rate offered will be around four per cent better.
Once you have created your FX policy, it should be reviewed regularly and be flexible enough to reflect the constantly changing nature of the markets. While it may be tempting to take a punt on the markets, abandoning your FX policy can increase your risk as extreme movements in the markets can catch you out.
In his next article, Andy Reid will be discussing the various payment service options, and their importance for managing effective business relationships.
Andy Reid is managing director of global payments at moneycorp, which provides international payments and foreign exchange services.