Ever wonder how a seemingly small shift in currency rates can send your business’s profits down the drain? It’s a phenomenon known as currency volatility which can affect a company’s bottom line, creating foreign exchange (FX) risk.
Foreign exchange risk is a reality for any company that makes international transfers.
But fear not, this blog explores the world of Foreign exchange risk, from its causes to the most effective strategies to protect your profits, even in stormy economic waters. It’s time to dive in and learn how to navigate the ever-changing currency landscape and conquer foreign exchange risk for your business.
What is foreign exchange risk?
In today’s interconnected world, international trade is a powerful engine for growth. But with every foreign transaction comes a hidden hazard: FX risk. So what is foreign exchange risk? Sometimes called currency risk, FX risk or forex risk, it refers to the profit and losses you could incur when making an international financial transaction, due to currency fluctuations.
For example, if you are an importer of clothing in the United States and you plan to buy a shipment of sweaters from Europe in several weeks, but the price of the euro increases, it could mean paying more for those sweaters than you budgeted, cutting into your profit margin on the product. “Understanding FX risk for your particular business is key.
Knowing how currency volatility could potentially impact your bottom line will help you to protect your business,” OFXpert, Harry Narenthira said.
Now that we’ve covered what foreign exchange risk is, let’s dive into its causes and currency volatility.
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What causes foreign exchange risk?
We’ve established that forex risk can have a huge impact on your business if you’re not prepared for currency volatility. So, what are the causes behind that volatility?
“Currency volatility, and therefore foreign exchange risk, can stem from many factors. This includes politics, monetary policy, current events, data releases, and so many more,” Narenthira said. Let’s explore some of the causes of forex risk.
- Economic Policy
Economic mandates like monetary or fiscal policies like interest rate decisions by a central bank are among the biggest influencers of currency risk. - Current Events
Significant events like wars, civil unrest, and high demand for certain resources can also influence the rate of foreign exchange. - Politics
Political factors such as political party economic stances, elections, and geopolitical tensions can create volatility in the FX space. - Data Reports
Data releases heavily influence currency exchange, with currencies often adjusting even before data is released as the market awaits reporting for past time.
While these are not all of the causes of currency risk, they are some of the most prominent ones. Being aware of these factors and arming your business with a risk management strategy could help protect your profits.
We have a variety of risk management tools to help you identify your potential risk, hedge your risk and stay ahead of volatility. View tools.
How OFX can help protect your business from foreign exchange risk
While these causes of FX risk may seem daunting, our OFXperts are prepared to help you develop a risk management strategy.
This involves developing a bespoke strategy for your business using risk mitigation tools like Forward Contracts and Limit Orders to help manage your company’s FX risk and save you time and money.
What risk management tools does OFX have to help me?
Your OFXpert is prepared to help identify your top FX risk factors and suggest a solution that may involve hedging tools like Forward Contracts and Limit Orders, as well as arm you with tools to ensure your business makes transfers at the right time for you like rate alerts.
Let’s explore some of those tools more in-depth:
- Forward Contracts
Allow you to hedge a percentage of your annual exposure at the start of the year to protect your business from volatility and book your remaining if the rate moves in your favour. - Currency Outlook
Our monthly Currency Outlook compiles our treasury expert’s outlook in combination with key currency shifts and global news, like politics, to lay out a comprehensive look into projected currency fluctuations. - Limit Orders
These are another risk management option that allows you to set the rate you are comfortable with and, once the exchange rate hits that point, your OFXpert will get in touch to let you know that it’s time to complete your transfer!
Once you understand the causes of FX risk and which currency fluctuations could be most detrimental for your business, it is easy to develop a bespoke risk management strategy with OFX.” – OFXpert Harry Narenthira
Now that you stand armed and informed, you are ready to face the volatile currency market. By wielding the strategies outlined here, you and your OFXpert can transform this potential threat into a catalyst for growth.
If you’re interested in learning even more about how OFX can help protect your profits, contact an OFXpert today!
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IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.
