Currency Risk Management: Why It Matters More Than Ever
Geopolitical events and currency movements are unpredictable, but your company’s currency exposure is within your control. If your business is exposed to currency risk, having a robust currency risk management strategy has never been more crucial.
Global economies are still reeling from the effects of wars in the Middle East and Ukraine, coupled with geopolitical tensions in Asia, particularly around Taiwan. The current high volatility in currency markets reflects these events, creating a “new normal” for businesses engaged in international trade.
While the geopolitical landscape weighs heavily on European and global economies, progress in the fight against inflation has led to reduced interest rates. These varying rate changes across countries are reshaping currency values. To mitigate potential disruptions from this realignment or the next “international shock,” your company needs a well-structured currency risk management plan.
Five Practical Tips to Improve Your Currency Risk Management
- Clearly Define Responsibilities
Ensure the treasurer or controller has well-defined limits (tolerable losses) for managing currency risk. Equip them with the right tools to act decisively within a policy framework endorsed by the company’s leadership. Support from management is critical for timely action. Be proactive and prepared.
- Leverage Relevant Information
Access to accurate and timely information is the cornerstone of effective currency risk management. Streamline workflows to ensure departments contributing to currency risk (sales, procurement, production) are synchronized with the company’s currency position and operational cycle. Simplify the flow of data to empower strategic decision-making.
- Implement Simple Improvements
Even small adjustments can yield significant results. For example, accelerating data entry into systems or standardizing supplier information can save time and reduce risk. Recent currency fluctuations show that delays of even a few days can be costly.
- Periodically Reevaluate Strategies
Regularly assess your approach with questions like:
- Are we fully utilizing internal hedging options?
- Are our hedging costs justified by the potential losses?
- What is the size of our residual risk (unhedged exposure)?
- Are we over- or under-hedged?
- How close are we to our breakeven point?
This reflective process ensures your currency risk management strategy remains effective and aligned with business goals.
- Identify Success Factors and Monitor Progress
Define key success factors and establish measures to maintain them. Track these metrics regularly to ensure continuous improvement. The right combination of expertise, tools, and clear processes is essential for maximizing the benefits of currency risk management.
Boosting Currency Risk Management with D-Risk FX
Managing currency risk can quickly become complex, especially for SMEs involved in international markets. This is where D-Risk FX Budget & BI becomes an invaluable ally for financial controllers and CFOs.
This cloud-based platform provides:
- Performance, risk, and scenario analysis segmented by market, currency, and business line.
- Tailored hedging strategies.
- Real-time monitoring of anticipated performance.
By automating processes and centralizing data, D-Risk FX simplifies currency risk management while offering actionable insights to protect your margins.
Whether navigating geopolitical uncertainties or planning for growth in international markets, an effective currency risk management framework is indispensable. Empower your business with the right tools and strategies to mitigate risks, protect margins, and seize global opportunities with confidence.
International Markets: A World of Opportunities
Expanding your business abroad is a source of growth but also exposes SMEs to risks. Tracking the successive impacts of exchange rates on anticipated performance can be complex.
D-Risk FX offers SMEs performance, risk, and scenario analysis segmented by market, currency, and business line. The result is a tailored hedging strategy with real-time monitoring of the company’s anticipated performance.
Gain autonomy, automate your processes, and approach international markets with the confidence of a clear currency risk management strategy and monitoring system aligned with your ambitions.
For more information on foreign exchange risk, please read this article published by BDC.
