Currency Exchange Strategy As Insurance

Why Currency Exchange Strategy Is Good Insurance

Foreign currency exchange (forex or FX) rates are a factor that any business buying and selling in multiple currencies should consider. In today’s volatile economy, currency exchange rates can experience drastic swings and a move in the wrong direction can deal a devastating blow to a company’s cash flow and liquidity.

Most businesses that deal in multiple currencies take steps to protect their holdings in those currencies against significant market fluctuations. If they’re not, it’s certainly something they should consider. There are several ways to mitigate the risks inherent to FX, one of the most important is the implementation of an appropriate currency exchange strategy.

A Basic Currency Exchange Strategy

There are a number of ways to save your business money when making currency payments, depending upon each company’s situation. Trade volume, market volatility, the specific currencies being traded and numerous other factors can enter into the equation. Few companies have the time and/or expertise to adequately follow all the indicators that will enable them to make the most effective currency exchange trades.

For most, the best option is to engage the services of a professional FX broker, not only to perform their trades, but to construct a currency exchange trading strategy that best suits their situation and offers the best protection.

After carefully analyzing the company’s cash flow history and projections, along with the interactions between all currencies involved, a broker can structure a strategy that will:

  1. minimize vulnerability to currency volatility
  2. optimize trades to take advantage of the best available exchange rates.

Limit Currency Exchange Risk & Mazimize Gains

There are many positions that can be taken to limit risk and maximize gains. When a company finds it necessary to receive large transactions in a foreign currency and their cash flow is fairly predictable, often they can time their FX transactions to coincide with payments in other currencies, as a means of optimizing their net gains or losses.

The key to the most successful forex transaction and currency exchange strategies is in balancing the net effects of exchanges in various currencies. Planning exchanges in advance can be an important part of such a strategy.

For instance, if your company receives a high volume of payments in yen, but has to make a sizable portion of its payments in yuan, it probably won’t make sense to convert yen to dollars and then make a second conversion of dollars to yuan. In most instances, allowing your yen account to maintain a balance large enough to handle your payables in yuan would allow you to simply convert directly from yen to yuan (provided that the net exchange rate is preferable), rather than having two separate conversions.

How to Define a Currency Exchange Strategy

There are many factors to consider when constructing a currency exchange trading strategy – the amount of total exposure in currency, the type of business, the number of different currencies, the cash flow needs of the business and more. This is why it’s always advisable to have a professional FX consultant help design your strategy, even if you intend to eventually manage it yourself.

It’s possible that if you work in enough diverse currencies, normal market fluctuations may be readily balanced across your portfolio. There are companies with large global footprints that work in enough different currencies that they can time their conversions internally, thus helping to balance any individual gains and losses. Having a partner with that ability can be a tremendous advantage, as it provides a great deal of leverage over exposure.

A Final Word of Advice

If your situation warrants it, you could also consider utilizing forwards or limit orders in your strategy, as a means of hedging against volatility of some currencies. Your forex broker can assist you in the most effective implementation of those positions.

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This post was contributed by Michael Ward, CEO, Europe & North America at OZ Forex and a Global Finance Conference speaker.

CFO and CEO speakers at the Global Finance CFO Conference include:

This conference is for and about CFOs. If you’re a CPA, CMA, CGA, Controller, Treasurer, Finance Manager or Finance Director, this conference is for you. If you’re in the finance department, you must attend this conference. Corporate finance professionals and chartered accountants will benefit from this Toronto conference. Everyone in accounting will benefit from this conference.

For more information about the conference review the agenda, or contact Daintry Springer (by email), Chair, 2014 Global Finance Conference.

Posted September 08, 2014 in: Blog by GFC Team

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