Protecting Profits from Currency Swings: Risk Tactics for Companies

If your business deals with foreign currency, it will be exposed to additional risk. A sudden swing in the price of the Euro or the Dollar might suddenly make a sale loss-making. These swings can significantly impact your business’s viability and make it more challenging to plan for the future.

So, what can we do to soften the impact?

Using Forward Contracts to Lock in Rates

A forward contract is a means of agreeing on a specific rate of exchange for a future transaction. This might involve locking it down for a specific period of time or a specific number of transactions. If you have many different forward contracts, then they’ll help to smooth out the peaks and troughs of the exchange rate.

Diversifying Currency Exposure

When one currency rises, another falls. By spreading your holdings and transactions across multiple currencies, you can protect yourself against market swings. You might, for example, work with dollars, euros, and pounds. That way, a slump in one of them might be counteracted by a rise in another.

Hedging Strategies for Importers and Exporters

Unfavourable movements in a foreign currency can drive down revenues and increase costs. Through a combination of forwards, futures, and options, you can craft a strategy that will deal with these risks. A good risk management specialist may help you to devise exactly such a strategy – one that’s aligned with the particular needs of your business.

The focus of your plan will depend on the nature of your business. Manufacturers might seek to protect their costs, while retailers might protect their revenue. What matters is that your strategy is tailored, specific, and open to change.

Monitoring Market Movements in Real Time

If you want to be aware of what your foreign currency is doing, then you’ll need to remain abreast of developments in the market. Tracking a currency in the right way often means investing in the right tools and keeping calm in the face of sudden swings. In some cases, unexpected shifts in the Bank of England’s base rate can inflate or deflate the pound. Knowing when the announcements are expected can therefore be very useful.

Collaborating with Specialist FX Partners

There’s now a wide variety of specialist firms that offer guidance on FX. Having access to the right partners can help you spot challenges and opportunities that would otherwise have proven elusive.

Of course, working with the right partners is not a substitute for investing in your own financial education, and that of your employees. Make sure you understand the fundamentals of the currency relevant to your activities, but know when to call on the experts.