A survey conducted by a large North American foreign exchange provider found that 80% of the corporations surveyed acknowledged that their businesses were exposed to significant foreign exchange risk. However, only 42% of these corporations indicated that they currently employ currency hedging techniques to manage their risk.
Our friends at Western Union Business Services have published a paper titled, Foreign Exchange Risk Management: Protect Your Profits and Prosper in an Uncertain Economy. While this is an area that I have no direct experience handling, I found it interesting and relevant for this site because it address’ how the act of managing foreign exchange risk can be strategic for an organization.
It is worthy to note that according to their paper:
A 2006 survey conducted by a large North American foreign exchange provider found that 80% of the corporations surveyed acknowledged that their businesses were exposed to significant foreign exchange risk. However, only 42% of these corporations indicated that they currently employ currency hedging techniques to manage their risk.
Financial Risk Management is part of the ‘F’ in FACTS based approach
This suggests that there is a lot of risk left on the table with regards to Foreign Exchange, that would be one of the areas of focus under a FACTS based approach of an Integrated Trade Compliance Strategy. The FACTS based approach is a way to view the tactical detail of reviewing aspects that relate to your trade compliance program. The letters represent that broad categories that we have found you should consider in your review Financial, Advisory, Compliance, Technology, Service. Rick Riess, President of GHY International shares his vision of this “unpacking the facts” approach in the following excerpt from the GHY International website:
Key to our approach is a comprehensive “360 degrees” trade assessment that examines your entire supply chain as an integral cycle encompassing various Financial, Advisory, Compliance, Technology and Service aspects of your business (that we collectively refer to by the acronym “FACTS”).
After having explored the FACTS to discover potential opportunities to increase your cash flow, compliance, supply chain visibility, etc., and/or decrease your exposure to the risk of non-compliance, the cost of excessive duty payouts, etc., we then develop a heuristic plan customized to your specific situation that allows you to “test drive” proposed solutions and evaluate them before proceeding further.
This road map is more clearly articulated on the GHY International web site where we share this vision as part of our approach with importers and exporters in order to define a GAP. You can read more about this offering here.
Foreign Exchange Management Expertise
In the white paper from Western Union Business Services they address the top 3 myths about currency hedging, which includes;
- Currency hedging is speculative and risky.
- Currency hedging is only for the short-term; in the long run exchange rates always average out.
- I don’t need to hedge currency risk if I operate in US dollars and conduct foreign business in US dollars—I’m not exposed to other currencies.
They also cover the 3 key components of managing risk with a hedging program. This and other great tips can be found in the white paper, you can check it out here.