The currency risk w By Nasir Zubairi I 54 entrepreneurcountry
n today’s world,“going global” is easier than ever, driven by the growth of eCommerce. Small and startup businesses can find themselves dealing with international clients and suppliers inadvertently rather than through a strategic
approach to expansion. Doing business overseas presents tantalizing opportunities – a larger target market, low cost sourcing and the moniker of being “international” that can have positive implications for brand and marketing. However, a major pitfall of international business is dealing with foreign currency and the uncertainty it brings in terms of revenue and expenses as well as the potentially heavy costs involved in exchanging currency to make payments or receive funds.
I don’t want to dwell too much on the direct costs of currency exchange that SMEs are exposed to through their bank. Suffice to say, it is currently a rip- off, but I am working hard to change
this.
Unfortunately, 90% of cross currency payments are still conducted through banks. I know businesses that are paying more than 9% in spread (the margin between the rate the bank will buy currency at and sell currency at) and fees to facilitate the exchange. Ridiculous. Instead, I want to focus on managing currency risk.
Volatile currency markets are a threat to every business, whether it is a three- man technology start-up in Hoxton or a global corporation with thousands of employees. Currency fluctuations, particularly acute today, can effect predicted revenue disastrously and lead to difficulties in covering expenses. The pain a business can feel when a currency move goes against it can be mitigated – and almost removed entirely – by implementing a series of risk management procedures.
Forward contracts are a currency risk management tool that enable a business to secure a fixed exchange rate for payments/income scheduled in the future, providing protection against volatility in the currency markets. Settlement of the payment can be
defined as flexible or for a fixed date. Businesses typically have the option to draw down (pay-as-you-go) on a fixed date or in an agreed time period. The ability to secure the rate helps mitigate currency risk, protects the company’s margin, and allows them to more reliably predict their cash flow. The ability to fix the rate for up to one year in advance helps businesses to budget and forecast with more precision for the forthcoming year. The risk management tool is also of great benefit to businesses that have to price goods or make purchases now but are not required to pay for them or receive payment until a future date; typical terms most are exposed to are 30 or 60 day payment terms.
Another way businesses can obtain protection against volatile currency markets is by building an income or cost stream in the same foreign currency to set off against
costs/income in that
currency, thereby removing much of the risk surrounding a major currency move.
Risk can also be managed implicitly through intelligent trade agreements
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