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Protect Your Business Against Currency Risk

Protect Your Business Against Currency Risk

Currency rates are constantly changing regardless of the market you're in, even stable markets could rise or fall unexpectedly due to currency rate fluctuations elsewhere.

If you’re a business owner, then it is tempting to play a gamble and hope that the market remains stable. Especially if you’re in Australia where the market has had gains for the past 6 days. But this could result in huge financial loss once the rates fall, as predicted. If you operate in the import and export industry, then price pressure can affect your business as customers will be looking to make the most savings while getting quality goods once the rates drop.

If you are importing goods from foreign countries then a fall in currency rates could impact your business as you look for ways to cope with the new rate. The same goes for exporting, if you had agreed on a particular price for certain goods with a foreign customer, then you could get a significantly lesser price due to the exchange rate when you deliver these goods. It is thus important to keep your business protected against currency risk and make sure that it runs efficiently even when there are major fluctuations in the exchange rates.

Here are some the ways to help protect your business from expected and unexpected changes in currency rates:

Forward Currency Contracts.
These are contracts that are agreed by both parties to exchange two specific currencies on a designated future date. The exchange rates are locked when the terms are agreed and so do not depend on exchange rates and thus protect business’ from it.

Foreign Currency Account.
These accounts are used to exchange currency where the amount is not denominated by the paying party’s local currency or by the account holder’s domestic currency.

Market Orders.
These are orders that are immediately completed at the best current price and are not affected by exchange rates.

Currency Hedging.
Hedging is the process of entering into a financial contract as a safety against currency exchange rates. There are 2 common hedging methods – The Cash Flow Hedge and the Fair Value method.

Loans.
Unsecured loans are a good way to pay for your imports without jeopardizing your company’s finances. They are quick and easy to get if you have a good credit history.

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All the thoughts, ideas and musings from the Moula team! Covering everything from work/life balance to general finance tips plus everything in between!

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