Top tips to help mitigate currency risk

09:45 13 June 2022

Clear Currency explores the impact of currency risk on your business finances and offers risk mitigation techniques you can deploy to protect yourself against it.

The international payment process exposes your businesses to the dynamic foreign exchange market
– Credit: Getty Images/iStockphoto

The only certainty in the unpredictable foreign exchange market is uncertainty. That’s because this behemoth is sensitive to a host of political and economic variables, from interest rates and levels of inflation to general elections – the outcomes of which are impossible to predict with precision.

For businesses with international payment requirements, this uncertainty manifests as currency risk: the possibility that adverse fluctuations in exchange rates will increase the cost of sending money overseas, reducing profits in the process.

What are the exchange risks?

The international payment process exposes your businesses to the dynamic foreign exchange market. Within this whirlwind of exchange rates, the value of one currency in relation to another evolves by the second under the influence of the variables that drive it.

Companies that take a reactive approach to exchange rates simply keep their fingers crossed and hope that they will act in their favor when it comes to executing payments. It may pay off occasionally, but if the rate suddenly drops even by a small amount, you’ll find yourself cursing your luck and counting the cost.

This emphasizes the need to mitigate currency risk for cross-border businesses – a proactive mindset that prevents adverse rate swings from hurting your bottom line.

Currency risk mitigation techniques

Timing is essential in the fight against currency risk. Therefore, you will want to execute your international payments when the forex market is at a favorable level. Hedging helps your business take control of its international payments by allowing you to lock in future exchange rates. This ability to mitigate the impact of currency risk is achieved by deploying solutions that protect you against currency volatility.

Taking this proactive approach to currency risk management will protect the cost of your international payments against market movements now and in the future. To achieve this, your hedging strategy must combine relevant solutions including:

Forward contract – This allows you to lock in an exchange rate and create a contract to continue using that rate for a specific period – from a week to a year – so you can secure the cost of your international payments when you make them . . An international payments specialist like Clear Currency will assign you a dedicated account manager who can work with you to execute a forward contract that augments your risk management strategy and can help you understand how to mitigate currency risk using other solutions.

Limit order – This allows you to target an exchange rate above the current market level. If the market reaches this level (of which there is no guarantee), you will secure your required rate and
maximize the return on your foreign exchange transactions. This type of contract is useful if you need to make an international payment but are not limited by tight deadlines.

Stop Loss Order – This allows you to set the minimum exchange rate at which you are comfortable with executing your international payment. If the rate falls to this level, your payment will be executed automatically, protecting you against adverse exchange rate fluctuations that could adversely affect your encrypted levels or your targeted coverage levels.

Manage your currency risk with Clear Currency

There is no one-size-fits-all approach to executing currency risk mitigation strategies to protect your profit margins from currency risk. Therefore, a tailored hedging strategy that takes into account your needs, business context and risk appetite will leave your business well positioned to execute effective solutions that match its unique objectives. The amount your company hedges its position depends on the level of risk it is exposed to and seeks to protect against.

Clear Currency can help you plan, execute and monitor a tailored hedging strategy tailored to the unique needs and risk appetite of your business.

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