Currency Risk Management
Geopolitical events and currency movements are impossible to predict, but your company’s currency exposure is within your control. If your business is exposed to currency risk, now more than ever, it is vital to take a proactive approach to currency risk management.
Global economies continue to be affected by the war in the Middle East and Ukraine, as well as geopolitical tensions in Asia, particularly around Taiwan. The future developments and repercussions of these significant events are simply impossible to foresee. The current high currency volatility reflects these events and represents a "new normal."
The geopolitical landscape places significant pressure on the European and global economy.
However, the fight against inflation is yielding positive results, leading to interest rate cuts. These rate movements, varying in magnitude across different countries, will cause a realignment of currency values.
To mitigate the effects of this realignment or the next "global shock," it is crucial to ensure that your business has a solid strategy for risk mitigation and monitoring to avoid unexpected costs and sustain performance.
Five Simple Ways to Improve Your Currency Risk Management
- Clearly Define Responsibilities
The treasurer (or controller) must understand the limits (tolerated losses) within which they are expected to manage currency risk and have the right tools to execute their role under a clearly defined policy accepted by the company’s management. More importantly, they must feel supported by management to act swiftly when needed. Be prepared!
- Capitalize on Information [1]
The controller must be able to make strategic decisions regarding profitability by having timely access to relevant information and the ability to process it through a clear and efficient workflow. This simple process involves all departments that can add or remove currency risk (sales, procurement, production, etc.) and aims to quickly synchronize the company’s currency position with its business cycle.
- Search for Simple Improvements
Small changes can have a significant impact. For example, recording certain data more quickly in systems, facilitating data collection by defining suppliers, formats, frequencies, etc. Recent currency movements have shown that a delay of just a few days can be extremely costly.
- Periodically Reassess Your Strategies
Take a step back and ask yourself questions such as: Are we taking advantage of all internal hedging measures? Are our hedging costs aligned with our potential losses? What is the size of our residual (unmanaged) risk? Have our recent actions delivered the expected results? How do we know if we are over- or under-hedged? How far are we from the breakeven point?
Clearly define key success factors and ensure they are effectively integrated within the organization by measuring them regularly. Having the right combination of expertise, information, tools, and clear processes allows businesses to fully benefit from currency risk management.
All these points can quickly add complexity and require special attention from the financial executive responsible for this aspect of the company’s international operations. This is where D-Risk FX Budget & BI becomes an invaluable ally for financial controllers and CFOs.
The cloud-based platform provides SMEs with performance, risk, and scenario analyses, broken down by market, currency, and business line. The result is a tailored hedging strategy and real-time monitoring of anticipated business performance..
The articles published during the COVID crisis suggest immediate actions in times of crisis and remain relevant today. Currency Volatility: COVID Second Wave, Political Uncertainty and Exchange Rate Risk, and Crisis and Currency Risk: Pandemic, Inflation, Market Volatility , and Crisis and Exchange Risk: Asking the Right Questions.
[1] When do you hedge your currency risk? ? [2] Currency risk management: a lever to achieve your international goals [3] Currency Risk Management Strategy: Are You Prepared?
Pour plus d’informations sur la gestion du risque de change, veuillez consulter les articles : Currency Risk Management: Incidence and Velocity and the article published by EDC: Managing Currency Risk.
International Markets: A World of Opportunities
Growing your business abroad can drive growth — but it also comes with risks for SMEs. Tracking the ongoing impact of exchange rates on forecasted performance is complex.
D-Risk FX provides SMEs with performance, risk, and scenario analyses by market, currency, and business line—leading to a tailored hedging strategy and real-time visibility on projected financial performance.
Gain autonomy, automate your processes, and approach foreign markets with the confidence of a clear currency risk strategy and the tracking tools to support your ambitions.