How Your Business Can Manage Currency Exchange Risk

3 min read

As businesses work with more international partners, they become more susceptible to the fluctuation in the exchange rate. We refer to that as currency exchange (FX) risk or FX volatility. Top finance leaders have warned that there would be increased currency exchange rate risks in the coming year.

This is due to the war in Ukraine, increased energy and food prices and potential global inflation in 2023. So, it will be useful for your business to understand how to intelligently manage increased FX volatility and FX risks.

Why is it important to hedge foreign exchange risk?

Imagine this, you are required to continuously pay your overseas suppliers in one month's interval due to the large scope of the project.  You agreed on the prices using today’s FX rates as reference. However, one month later, when your payment to your supplier is due, you got the shock of your life! The prices have increased by a considerable amount due to the large currency swing which has caused the weakening of your own home currency.

This highlights the importance of hedging or managing FX risk. When left unmanaged, huge currency swings would make international transactions more costly thereby increasing your business expenses. This would then negatively affect your business cash flow. Besides affecting your business cash flow, currency volatility would  often take a bite from your company profits which would make it costly for the company in the long run.

Ultimately, hedging or managing FX risks could be seen as insurance to reduce the potential cost of transacting in this increasingly FX volatile environment. Read on more to find out how to manage or hedge FX risk.

How does currency hedging work?

Currency hedging is a risk management strategy to protect one’s position in a currency pair from an adverse move. It can limit the loss and mitigate most of the uncertainty that comes with FX volatility. This technique is used as protection for when a business or a trader is concerned about volatility in the currency market.

Often, currency hedging makes use of derivatives, a financial instrument whose value is dependent on any underlying asset or currency which has the ability to profit when the market moves against your business transaction. This “profit” would form a hedge and cancel out any potential losses on your business transaction.

How to manage currency risk?

  1. Put Options

A put option is a financial instrument that gives the buyer the right to sell the security at a predetermined price within a specified time frame. Put options increase in value as the underlying asset (currency) falls in price.

So for example, you are required to pay your overseas suppliers, but with the huge currency swing, your profits would be taking a hit. However, with a put option, you are able to minimise the loss by exercising this financial instrument.  

That being said, usage of put options or derivatives requires an in-depth understanding to be used effectively and efficiently. Improper usage would lead to even larger FX losses .

2. Pass the currency risk onto your customers or suppliers

Another way to manage currency risk prudently for your business is by passing the risk onto your customers or suppliers.

Do this by sending your invoice and requesting the payment to be done in your home currency. Many businesses do this, so they do not inflict the worry associated with the currency exchange rate risk on themselves.

Nonetheless at times, this requires negotiation and compromise with overseas suppliers and customers to be willing to transact in another currency.    

Can you manage currency risk with Wallex?

You may be probably wondering, how can Wallex help you and your business in managing your currency risk?

Having an account at Wallex would provide you with many features such as our wallet feature which allows you to easily manage your currencies. You can then convert whenever you like, enabling you to choose an opportune time of hedging against the volatile FX market.

Moreover through converting FX with us, we always strive to let you convert to other foreign currencies at near mid-market rates.

To find out more about Wallex, go to: https://www.wallex.asia/

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