How to Manage Foreign Exchange Risk - An Essential Guide

During the Covid-19 pandemic, the foreign exchange market has seen dramatic fluctuations, including changes in currency rates. The global economy has almost ceased due to strict regulations regarding lockdowns and contain the outbreak. The pandemic has affected the stock market and oil prices, putting brakes on the global economy.

According to Alan Safahi, a San Francisco-based startup founder and entrepreneur, the forex market seeks safe-havens, and traders move toward the U.S. Dollar, Swiss Franc, and Japanese Yen. Safahi’s research and analysis show that commodity and smaller currencies have also suffered during the pandemic.

These currencies include the New Zealand Dollar, Australian Dollar, Swedish Krona, and Norwegian krone. In today’s article, we will guide you on how to manage foreign exchange risk. Make sure you read this guide thoroughly to get the most out of it. Read on!

Do Some Background Research

Alan Safahi of Orinda suggests traders do some background research on currency volatility to source the right supplier or search for overseas property. Because foreign exchange is a complex market, it is crucial to consult a specialist or expert who can guide you on the risk mitigation strategies and explain how to stay stable in the market.

Invoice and Contract in U.S Dollars

Individuals and businesses use different protection strategies against fluctuations in exchange rates. Invoicing and contracting in U.S dollars is the easiest strategy to keep your expenses, revenues, and profits in the same currency.

Traders who are active in their home currencies will have no transaction and translation risk because these risks are passed to their overseas business partners. However, some overseas business partners may charge you for them to take over the risks.

Use a Foreign Currency Bank Account

According to Safahi, Founder at Zed Network, a payment orchestration platform focused on cross border payments and FX, “matching” is another effective option to mitigate or manage risks in foreign exchange. For instance, you need to open a foreign currency account and match your sales receipts from foreign customers with payments due to foreign suppliers with the same currency.

Make sure you deposit the receipt in the bank account and then use your balance to pay the supplier. It is an effective strategy because it reduces your currency exposure to your balance left in the account, especially after meeting the foreign-currency liabilities.

Use Hedging Methods

Safahi, a global entrepreneur with thorough knowledge of hedging methods for foreign exchange risk management, suggests that, if several months are likely to pass between your contract signing and payment in a foreign currency, it is better to hedge it through a forward exchange contract.

Bear in mind that such contracts are typically the “purchase now and pay later” deal, allowing you to lock in exchange rates at a determined date in the future. According to Alan Safahi of Orinda, the set date is usually anywhere between 6-24 months.

A forward contract is an excellent way to manage foreign exchange risk because one party buys and another sells currency on a set date in the future at a predetermined exchange rate. You can make contracts with a bank or currency provider through Zed to minimize risks.

Final Words

Foreign exchange risks involve fluctuations in currency exchange rates, affecting a company’s financial performance. Remember, these changes in currency exchange rates can significantly damage your business profits by consuming into margins. If you want to manage foreign exchange risks, follow the tips and tricks given above. These guidelines are based on Alan Safahi’s years of experience and up-to-date knowledge of the market.