Managing foreign currency
risk
In response to a question about how
they manage changes in foreign
currency risk, survey respondents
focused on two solutions: “adjust
product pricing higher in the marketplace” (ranked by respondents an
average of 8.13 out of a possible 10)
and having a “hedging strategy in
place to manage risk against future
changes in foreign currency” (ranked
at 8.00).
The leading strategy, adjusting product
pricing higher in the marketplace, can
create issues companies may want to
consider in advance. For example, if
retail stores adjust prices still higher,
the consumer response and resulting
trends bear watching. Some retailers
are pushing back against price
increases, and some vendors are left
to look for more cost-effective ways to
manage their margins.
Having a hedging strategy, the second
leading response, hinges on internal
cash flow management and making
sure you’re hedging for the right time
frame based on your foreign currency
payments. Managing cash flows
starts with having a plan that aligns
with your business needs. Although
there are many products out there
that can help hedge foreign currency
risk, forward currency contracts and
foreign currency options are the most
common. The two sound similar, but
they are different, each with their
own benefits and drawbacks. As the
name implies, currency options give
you the option to purchase a foreign
currency amount in the future, with no
obligation to act.
However, this does come at a premium.
Forward contracts, on the other hand,
more or less and how are we timing
payments to leverage that?
involve an agreement to buy the
foreign currency on a set date, for a
set amount, and at a pre-determined
price. Typically, companies investing in
forward contracts are speculating that
the foreign currency will appreciate,
and they enter into these contracts
to minimize losses. Although having
a plan does not guarantee profits, it
can help minimize further losses due
to foreign currency fluctuations.
Renegotiating lending
agreements to prioritize local
currency loans over foreign
currency lending.
If a company has the ability to
renegotiate lending agreements such
that local currency loans are paid prior
to foreign currency loans, this may
help minimize foreign exchange on
cash flows, at least for the short term.
It works by timing loan repayments
so that local currency loans are repaid
first. This strategy is most appropriate if
foreign currency fluc