Reduce Exchange Rate Risk
Posted Under: News
Running an international business means you’ll always be subject to foreign exchange (FX) rate risk, even if you’re transacting in your home currency. Any time a U.S. company accepts or sends a payment in a foreign currency, there is a risk of the exchange rate changing before the transaction is complete. If the rate moves against you, the transaction will cost more. Depending on how much the rate moves and your profit margin, this can have a big impact on your bottom line.
The longer the time between the original payment agreement and the actual transfer of money, the more that can happen to affect the exchange rate. For instance, foreign currencies can fluctuate in value because of inflation, unemployment, or election results. Volatility can also be triggered by other news or global events like weather or the pandemic.
A certain amount of risk is expected in doing business, especially with international transactions. However, there are ways to manage FX risks to minimize your chance of large losses.
Hedging refers to actions you take to help limit your risk on an investment. There are many ways you can hedge your foreign currency payments that will allow you to protect your business and preserve profits. This is especially important when you have longer payment terms, such as 30, 60, or 90 days out. Common hedging strategies include:
- Forward Contracts allow you to lock in currency at today’s rate for a specified amount of time, protecting you from long-term market fluctuations.
- Market Orders give you an opportunity to place a currency trade at a specific target rate, instead of at a specific time. This lets you take advantage of market moves in your favor even when you’re not watching the market.
- Multi-Currency Accounts allow you to hold several currencies in your digital wallet so you can either use the foreign currency to make payments, or to collect then exchange to dollars when the rate is favorable. These accounts make it easier to manage several currencies and give you flexibility.
FX forecasting is an important tool to help you make decisions about your FX trades so you can minimize risk and maximize returns.
- Technical or Chartist Forecasting uses the lens of economic theories and historical data to examine today’s data and pinpoint patterns and cycles.
- Economic or Fundamental Forecasting is based on economic or fundamental principles and looks at the relationship between two countries and their monetary policies.
- Market-Based Forecasting focuses on what’s currently happening in both the currency market and economic sentiment. It also factors in economic data like employment, retail sales, and manufacturing indexes to make projections.
Plan for Success with the Help of An Expert
Operating an international business means you must have a plan to stay on top of the FX market. Without planning, you’re at the mercy of market volatility. Incorporating FX forecasting and hedging into your plan will help manage your business risk. However, these strategies can take time and resources to execute properly.
If you don’t have the time to follow every move and every piece of news or monitor the currency market all hours of the day and night, you can still manage your business risk. You need an expert on your side to make sure you are not taking unnecessary risk or leaving money on the table. By partnering with someone who can combine forecasting experience with hedging strategies that fit your business model, you can minimize risk while maximizing returns.
With expert help from GreenShootsFX, you’ll have the top hedging strategies to keep your business from being exposed to the whims of global politics, environment, or other news. Put a plan into action to protect your business, so you won’t have to worry about a market move that wipes out your profits or leaves you with a significant loss on a transaction.
Let us help you manage your FX risk, protect your profits, and sleep better at night