Foreign Exchange Exposure Definition
Foreign exchange exposure refers to the risk a company undertakes when making financial transactions in foreign currencies. All currencies can experience periods of high volatility which can adversely affect profit margins if suitable strategies are not in place to protect cash flow from sudden currency fluctuations. Exchange rate risk can usually be managed through effective, preemptive hedging.
When supply chain payments or critical accounts are based in foreign currencies, companies may choose to employ a targeted currency strategy
to minimise foreign exchange exposure. These strategies usually involve contracts that allow companies to lock in an exchange rate for an extended period of time, often up to one to two years.
How can your business limit foreign exchange exposure?
OFX provides a number of risk management tools
to help businesses limit their foreign exchange risk. Here are the basics:
Spot and Forward Foreign Exchange Contracts
Spot and forward contracts are the most basic risk management tools used in foreign exchange. These contracts specify the terms of an exchange of two currencies between an end user and their financial institution.
In any foreign exchange contract, a number of variables need to be agreed upon. These are:
- The currencies bought and sold. (Every forex contract involves two currencies, one that is purchased and one that is sold.)
- The amount of currency to be transacted.
- The date when the contract matures.
- The rate of exchange at which the transaction will occur.
Payments to overseas suppliers or staff may be primarily affected by exchange rate valuations, but bank fees can also chip away at profit margins. That’s why many small businesses have chosen specialist money transfer providers to make faster, cheaper and more convenient overseas payments.
For companies who sell primarily via online marketplaces, the ability to access international marketplace and be profitable in those markets may depend on retaining control over when to bring revenue home from overseas. A specialist money transfer provider like OFX allows online sellers to bring their profits home at better exchange rates and with less currency risk.
To learn more about how OFX can help your business reduce foreign exchange exposure, contact us today to get the savings and service you deserve.
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