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Forex Risk Management in an Uncertain Global Environment

By Megan Doyle

While it might be getting easier for businesses of all sizes to participate in international trade, navigating foreign exchange (forex) risk management strategies seems to be getting more difficult.1 Turbulence stemming from the recent global economic slowdown, current trade tensions, and political uncertainty are making it harder to forecast currency fluctuations.

Without effective forex risk management strategies and the ability to forecast forex movements, international businesses—especially small and midsize enterprises (SMEs)—risk negative impact to the bottom line.2 Fortunately, there are several tools, techniques, and strategies businesses can employ to better manage forex risks in today’s ever-changing global business environment.

 

Managing Forex Risk with Forward Contracts

 

Forward contracts let a business buy or sell currencies at an agreed-upon exchange rate on a certain date within the next two years.3 A business signs the contract with a financial institution, which will then exchange the sale price in the importer’s currency for the equivalent in the exporter’s currency.

 

For example, suppose a U.S. business must pay their Japanese supplier 55 million yen in 120 days. The U.S. business could enter a forward contract with its bank, stating it will purchase 55 million yen in 120 days at the current spot rate. This way, if the U.S. dollar depreciates against the yen after 120 days, the U.S. business will not lose money. However, if the yen depreciates against the dollar, the business will not be able to profit from the favorable exchange-rate movement because it is obligated to fulfill the contract with its bank.

 

There are several other similar forex risk-hedging strategies and derivatives that businesses can use as part of their forex risk management strategies. Forex orders, swaps, futures, and options are among them. Experts suggest that these can afford a business more flexibility and customization when used as part of a forex risk-management strategy.

 

Multi-Currency Accounts Can Simplify Forex Risk Potential

 

Some experts suggest that, if a company regularly does business with one foreign country, it can reduce forex risk and exchange rate fees by opening up a foreign bank account in that country. However, when a business holds multiple currencies in several different accounts, it increases its exposure, which, in turn, increases the company’s risk potential.

 

To manage such forex risk, businesses might also consider opening a multi-currency account. Multi-currency accounts provide a streamlined, integrated way for a business to manage different currencies, all in one place. This can simplify the account structure, making it easier to control finances.

 

Multi-currency accounts can also reduce the number of foreign exchange fees that a business would otherwise incur when converting payments. This can be especially useful for businesses that consistently make and receive payments in a foreign currency.

 

Incorporating AI for a ‘Smart’ Forex Risk Management Strategy

 

Effective forex risk management can involve many different factors and calculations, making it a time-consuming and complicated process. Add the layer of increasing global uncertainty and currency volatility, and forex management may feel like an impossible task.4 What’s more, many SMEs can’t always afford to absorb the cost of currency fluctuations without passing those costs on to customers.5

 

Artificial intelligence, machine learning, and automation, however, can help a business streamline its forex management strategy in a more cost-effective way. For example, AI-based forex risk management tools can link algorithms to real-time data that reflects current global economic flows. What’s more, machine learning can continually update and improve the automation process by studying past economic trends.6 Ultimately, AI and machine learning can monitor the value of different currencies to help businesses decide when to buy and sell—leading to safer, less subjective decision making.7

 

Using Fintech Companies to Make Forex Payments

 

Traditional banks can handle currency conversions, of course, but some fintech companies are appearing that might prove cheaper alternatives, say observers, offering more capabilities for businesses that need to exchange currencies and manage risk.

 

Some fintechs, for example, provide one-stop hedging platforms complete with forex management tools, automation technology, and the means for a business to make and receive payments in other currencies.8 Real-time currency tracking can help businesses quickly respond to currency fluctuations, and integrated automation solutions can help solve operational inefficiencies to make forex risk-management easier.

The
Takeaway:

Entering the global marketplace might be easier than ever before, but experts suggest that getting involved in international business also means companies must keep a close eye on their forex risk management strategies—especially with the uncertainty and turbulence in today’s global business environment. To help effectively hedge against forex risk, businesses might wish to consider using strategies such as forward contracts, multi-currency accounts, artificial intelligence, and fintech solutions to help forex management not seem so foreign.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. “Managing FX risk in a volatile world,” Treasury Today; https://treasurytoday.com/insight-and-analysis/short-reads/managing-fx-risk-in-a-volatile-world-ttti
2. Ibid.
3. Ibid.
4. “AI in corporate foreign exchange hedging,” Financier Worldwide; https://www.financierworldwide.com/ai-in-corporate-foreign-exchange-hedging#.XSXaTC2ZO35
5. “How Machine Learning Can Help Reduce Foreign Exchange risk,” Inside Big Data; https://insidebigdata.com/2018/03/30/machine-learning-can-help-reduce-foreign-exchange-risk/
6. Ibid.
7 “AI in corporate foreign exchange hedging,” Financier Worldwide; https://www.financierworldwide.com/ai-in-corporate-foreign-exchange-hedging#.XSXaTC2ZO35
8. “The Banks Wanted To Sink This Forex Fintech: Now They’re Vying For Its Technology,” Forbes; https://www.forbes.com/sites/alisoncoleman/2017/10/12/the-banks-wanted-to-sink-this-forex-fintech-now-theyre-vying-for-its-technology/#142d3a7563da

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