With a daily trading volume of over $5 trillion, Forex is the largest financial market on the planet. The sheer scale of the Forex market means it is sensitive to a multitude of political and economic variables; the outcome of which dictates the value of one currency against another. This creates challenges for cross-border business, who must manage their exposure to currency risk.
To do this effectively, it helps to define your objectives and understand how you aim to achieve them. Here are three questions you need to answer to get ahead in the world of corporate Forex.
What are your market expectations?
A lack of knowledge about the Forex market might leave you considering a reactive approach to exchange rates, in the hope they move in your favour when the time comes to execute payments. While this has the potential to pay off occasionally; it could leave you cursing your luck – and counting the cost – if the market suddenly moves against you. Even more so if it stays there for a sustained period.
If you don’t want to leave your business’s finances in the hands of lady luck, adopting a proactive approach to exchange rates is highly recommended. This pragmatic mindset involves monitoring the market and planning for any eventuality, so you can rest assured that adverse rate fluctuations won’t impact your bottom line.
What is your risk appetite?
Before deciding your business’s level of currency risk exposure, it helps to develop an understanding of the factors that influence the value of exchange rates – from inflation to elections. Armed with this working knowledge of the Forex market, and having defined your market expectations, you will be well-placed to develop a currency strategy based on your risk appetite.
The extent to which your business hedges its position will be determined by the level of risk it’s exposed to and seeking protection from. For example, are you happy to use straightforward currency products like a forward contract, or more complex option solutions, which allow you to mitigate certain elements of currency risks?
How will you manage your currency risk exposure?
Having assessed your business’s risk appetite, work with a currency specialist to establish a hedging strategy. This proactive approach to currency risk management mitigates the impact of market movements by allowing you to lock in future rates. You will be assigned an account manager who can help you take advantage of financial contracts that protect your international payments from unexpected fluctuations in exchange rates.