If your business regularly exchanging currencies, then you need to take FX risks very seriously. By transferring large amounts of money between different currencies, you can open yourself up to four, five, and even six-figure losses. Depending on how much you’re transferring, of course.
Fortunately, there are things you can do to hedge against those risks and minimize the chances of this happening.
With that in mind, here’s our guide on how to minimize your risk as an FX business.
Firstly, what are the risks?
Before we dig into solutions, it’s worth going through the different potential risks that come from moving in the FX markets.
Currency translation risk
First and foremost, currency translation is probably the biggest risk to any business making large transfers.
The biggest problem is that, fundamentally, there’s no way to know how the markets will move day-to-day. Even on major events like the US election or the Brexit vote, market analysts may be able to make an educated guess…but they never complete know.
Unfortunately, a shift in the market of even 0.05% can make a big difference to how much value you get from your transaction. Given that you have no control over the markets, it’s no surprise that businesses are concerned about this risk.
Let’s say you agree on an exchange when the rates are in your favour, and you’re happy to go. Unfortunately, on some occasions, the rate can slip heavily in between you making the payment and then the transaction actually settling.
Again, if it’s a bad slip this can lead to you getting a much worse deal through something that’s not actually your fault! In the long term, repeated instances of this could cost your business a lot of money. It can also make it trickier to budget effectively, simply because you aren’t exactly sure of your final sum until it arrives!
In the long term, you’re also open to economic risks. If your home country goes through a period of economic decline, the home currency will likely also devalue. If you’re invested in that currency at the time and you’re planning to use it internationally, you’re then automatically financially worse off.
(It is worth noting, of course, that any of these market movements can also work in your favour…but that lack of certainty is also the reason for the risk.)
How, then, can you mitigate against your FX risk?
There are a number of different strategies you can use to help minimize the risk of market movements causing your business to lose money.
By using a forward contract, you can lock in your exchange rate for a transaction up to 2 years in future.
Once this agreement is in place, you’ll know that no matter what the markets do your exchange rate for that transaction is locked in place. You’ll be able to budget with complete certainty, and with peace of mind that if the rates change, your business won’t be affected.
The simple fact is that most high street banks will take your money and make your transfer with no interest in what your needs are, and knowing nothing about your business.
By working with a bespoke FX broker, you’ll get more personalized service. Your broker will get to know exactly what your needs are, and they can work with you to help time your transactions so you get the maximum value from them.
Watch the market
One of the most effective ways to make sure you get the best rate is to simply watch the market. If you keep a close eye on things, then you’ll get a much better idea of what the good rates are in the current circumstances.
Of course, another major benefit of working with a dedicated FX broker is that they can do the work for you. If you agree with your account manager on a rate you’re happy to trade at, they can then watch the markets on your behalf and alert you as soon as your specified rate comes in.
These services – also known as e-wallets – are ideal for helping to hedge your rates. If you hold an e-wallet, then you can store money in many different currencies within that wallet. This means that you never officially ‘exchange’ rates until you choose to actually withdraw the funds to your main company account.
This means that you can move money into different currencies and then wait until the rates are in your favour to actually complete the exchange.
Minimise your FX risks today
Privalgo has over 100 years of combined experience in the FX markets, and we’ve helped companies like yours minimize their FX risk over and over again.
If you’re planning to make a currency transaction but you want to minimize the chance of losing money, we can help.