Without doubt, 2016 has been a rollercoaster of a year for the currency markets and in light of this, businesses making international payments are more aware than ever of the impact that currency volatility can have on their bottom line.
Introducing the four pillars of effective risk management FX planning:
Understand your business requirements
As part of the financial planning process that takes place within a business, exposure to foreign currency should be deemed as high on the priority list. It is essential to analyse exactly where the FX risks are likely to exist for your business over the short, medium and long term. Once a business determines its FX objectives, the next step is to determine the appropriate strategy.
Understand the products
When assessing the effectiveness of the FX strategy in place, reviewing the component parts and which percentage of the strategy is made up of Spot, Forward and Options, is a good place to start. As volatility fluctuates, Option pricing can become more favourable, with the possibility of adding more of this type of product into the strategy. Likewise, as market sentiments evolve, it may be necessary to add more forward cover to protect further downside moves.With a solid understanding of currency forecasts, the next step is to look at the products available that both effectively mitigate risk, and allow you to benefit from favourable moves in the market. If a business requires constant and ongoing access to funds, then a higher proportion of Forward contracts will be most suitable. Likewise, if an appetite to outperform the market exists, then more in the way of structured FX Options will be applicable.
Decide on your strategy
Businesses need to reflect their attitude to risk, their view of the currency markets, their appetite to pay premiums and a host of other factors in a measured and balanced way, with most adopting a blended approach.
Execute your strategy
Constant, real-time management of FX has never been more important. Much like a fund manager would constantly tweak and add to investment strategies, an FX strategy needs to be approached in a very similar way.
Businesses can be tempted to defer implementing their FX risk management strategy, maybe in the hope that rates may move in their favour in the short term. In reality, the only certainty we have going forward is that market volatility will remain, making it essential that FX planning is a top priority for financial decision makers executing international payments.
Global Reach Partners have a long history of helping businesses to implement robust and comprehensive risk management strategies to minimise their exposure to adverse foreign currency movement. If you would like to speak to one of our currency experts please contact us on 020 3465 8200