Understanding and managing exchange rate risk is a subject of obvious importance to business owners because of the huge impact it can have.
British markets braced on Wednesday for more political drama, as Prime Minister Boris Johnson was rocked by further ministerial resignations and calls for him to go, although traders were reluctant to take new positions given the uncertainty. The pound dropped to more than two-year lows against the dollar but the moves were largely driven by a broad-based rally in the U.S. currency as investors, worried about rising recession risks, looked for safety. (LONDON, July 6, Reuters)
As globalisation and currency volatility increase, changes in exchange rates have a profound impact on companies’ operations and profitability. Small and medium-sized businesses, as well as those that only operate in their home country, are affected by exchange rate volatility, as well as multinationals and large corporations.
But how does currency volatility affect you and your business?
If not managed properly, adverse currency exchange movements could potentially wipe out any profits you make from export sales. Conversely they could increase the amount you’re having to pay suppliers. Continued uncertainty surrounding the pound has changed the way many SME owners manage currency risk and the way they are doing businesses internationally. Many small businesses (particularly those with exports) view currency volatility as the largest threat to managing currency risk. Some are looking at increasing the pricing of their services or products. Others are re-negotiating contracts with suppliers or more actively managing their exchange rate risk.
So, what can you do about it? And how best to protect yourself and your business?
Here are three ideas to consider:
1. Assess your exposure
Know whether it’s worth pursuing a policy to manage currency risk. If you’re only making small payments, it’s probably not worth it. But for larger payments, be aware of what you stand to lose if rates move against you.
2. Enter into financial instrument contracts to “hedge” the exposure
A hedge means that you are creating a profit or a loss that cancels out your currency exposure.
3. Pass the risk on, if you can
By raising prices or asking overseas clients or suppliers to pay or receive in a different currency.
Understanding currency risk is not straightforward.
If you need help, please get in touch. We also have specialist broker contacts who can help you manage your risk.