Risk Management | Articles
Foreign exchange confusion: Why some companies ignore currency risk management
Many leaders ignore what may be one of their biggest risks: foreign currency volatility
If you ask a business owner about the biggest threat to their profit margin, they’ll likely say a poor sales cycle, labor costs and direct competition. That’s understandable as many of these factors can be costly or outside of a company’s control. Yet many leaders ignore what may be one of their biggest risks: foreign currency volatility. From small operations to medium-sized enterprises, managing incoming and outgoing foreign payments is a regular task for many. Working with foreign partners like international suppliers and vendors can help a business save on production costs, expand their customer base and grow to a global operation. Yet international payments are subject to foreign exchange rates, which can vary unexpectedly.
Myths about Foreign Exchange for Business
Volatility isn’t that bad: To a degree, all currency pairs actions experience some fluctuation. For example, if a US supplier purchases £10,000 worth of supplies from the UK each month, their August 2019 invoice would cost about $12,150 USD. Yet two months later the cost could be over $500 more, simply due to an increase in the exchange rate. For £100,000 invoice the difference would be a steep $7,290 USD. Such unpredictability may make it difficult for a business to effectively manage their cash flow and could erode profits.
Payment in USD: Even using USD with a foreign party may not avoid the issue of volatility. Billing in US dollars is common in many parts of the world, due to the widespread use of the currency. Yet an international partner who accepts USD will eventually conduct a currency exchange to their local funds. To account for any possible rate shifts, some vendors will pad their total cost to protect from potential lost profits.
Risk management is for large corporations: FX risk management is a valuable tool regardless the size of the business. Businesses with foreign exposure should consider exploring ways to help reduce their possible profit loss and manage uncertainty.
Hedging strategies are complicated: Strategies are employed by very small companies and very large corporations. Depending on the nature of your business, they can be straight forward, simple and automatic or more complicated. Depending on how complex your business is, a hedging strategy will generally reflect that reality. Because of this, it’s very important to consult a risk management specialist who spends the time to get to know pertinent aspects of your business so they can help you construct a strategy that is suitable for your business and help schedule revisions so your plans can evolve.
How do you mitigate foreign exchange risk?
There’s a wide variety of available tools to help you manage currency risk including forward contracts, future payments, market order, option contracts and more. It can be overwhelming for any business leader to formulate the optimal plan, especially when many businesses find it challenging to identify where their cash flow is exposed to currency volatility. Our risk management team can help organizations evaluate and construct a comprehensive solution.
Western Union Business Solutions is a business unit of The Western Union Company. Services in the US are provided by Western Union Business Solutions (USA), LLC (NMLS ID: 907333; MA MT license #: FT0041) (referred to as “WUBS” or “Western Union Business Solutions”). For a complete listing of US state licensing, visit http://business.westernunion.com/about/notices/. For additional information about Western Union Business Solutions USA, LLC visit http://business.westernunion.com/About/Compliance-Legal.
This brochure does not create any binding obligation on any party, nor does this brochure constitute an offer or a solicitation of an order. Any such offer or solicitation will only be made, and the relationship between you and WUBS shall be governed by the applicable terms and conditions and any transaction-specific documentation entered into between you and WUBS. No representations, warranties or conditions of any kind, express or implied, are made herein.
WUBS is the issuer of the products discussed herein and would be a counterparty to any transaction you undertake with WUBS. This brochure is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject WUBS or its affiliates to any registration or licensing requirement within such jurisdiction.
WUBS is not registered with the Commodity Futures Trading Commission as a Commodity Trading Advisor, as a Swap Dealer, or in any other capacity. WUBS is not a member of the National Futures Association. Protections that would otherwise be available under the Commodity Exchange Act, the rules of the Commodity Futures Trading Commission, or the rules of the National Futures Association will not be available to you in connection with your relationship with or transactions with WUBS.
Customers may be required to meet certain eligibility requirements in order to enter into foreign exchange transactions with WUBS. Claims regarding the products discussed and other information set out herein are general in nature and do not take into account your specific objectives, financial situation, or needs. This brochure does not constitute financial advice or a financial recommendation. You should use your independent judgment and consult with your own independent advisors in evaluating whether to enter into a transaction with WUBS. WUBS bases recommendations only on general industry knowledge and the client profile you have provided, and WUBS is not undertaking to assess the suitability of any recommendation for your particular hedging needs. WUBS has based the opinions expressed herein on information generally available to the public. WUBS makes no warranty concerning the accuracy of this information and specifically disclaims any liability whatsoever for any loss arising from hedging decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.