Your business makes global payments, but have you managed your exposure to currency risk?
Considering international payments can often be a tricky landscape for those tackling it for the first time, coupling standard foreign exchange tools with support in creating a long-term currency strategy is really important for growing businesses today.
But this increased opportunity comes with substantial risk to your future business earnings. This risk is made up of unnecessary costs from foreign exchange providers and potential losses incurred by adverse movements in foreign exchange rates.
But how do you know if your business needs to manage its currency risk?
Does your company:
- Make international payments
- Receive international payments
- Pay overseas employees
- Have non-domiciled assets in need of maintenance
If so, your bottom line could be affected by exposure to currency risk, causing uncertainty about how and when to make your payments.
So now that you know whether you need to manage your currency risk, how do you take action?
Step 1 - Understand the causes of currency risk exposure
There are a number of reasons for currency fluctuations and this can include:
- Global events from terrorism to natural disasters
- Data releases by central banks and financial institutions
- National and international policy changes
When trying to make international payments these are often worsened by:
- Uncompetitive exchange rates offered by the banks
- High transaction fees
For example, if you are an importer who buys inventory in USD, a rise in the value of the US dollar could result in you spending more AUD to meet the USD buying price.
Alternatively, if you’re an exporter with a price list in AUD, a fall in the value of the Aussie dollar could mean less AUD in return for your product.
Additionally, by making payments through your bank, you are subject to the bank’s prevailing exchange rate. Banks and other financial institutions typically add a higher margin to the daily 'market' rate, meaning that these rates can be much higher than what an alternative provider could offer.
Step 2 – Stay informed of potential currency movements
For a more in-depth analysis of global currency movements you can download the latest edition of the OFX Currency Review, which dives deeper into what's influencing markets, forecast data for the next quarter as well as the key events to watch.
You may not have access to your bank’s treasury department, but at OFX, we have currency specialists on call 24 hours a day, seven days a week to understand your needs and present our range of currency management options. Corporate customers also have access to a dedicated account manager to help with planning a currency strategy that works for you and your business.
Step 3 – Take action
Whether you make international payments once a week or once a year, it could be worthwhile building a currency strategy with your immediate business needs in mind. There are a number of current management tools available that are designed specifically for mitigating market risk.