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Currency fluctuations can put your bottom line at risk
Currency risk forms an unavoidable part of operating across global markets. While risk may seem a remote problem, recent years have told us that massive swings in currency pairings can have a negative impact on thousands of businesses.
If it’s not managed correctly, currency risk can substantially impact your bottom line. This blog post will highlight five ways currency risk can influence your business and present some simple strategies for hedging against this risk.
Eroding Profits
The most immediate way currency risk can affect your business is by eroding profits. Fluctuating exchange rates mean that the value of payments received from overseas customers can vary greatly. If you’re not careful, what initially appeared as a substantial profit can quickly become a loss.
Smart Currency Business recommends a forward contract, which allows you to lock in a specific exchange rate for a future date, protecting your business from unexpected currency fluctuations.
Increased Operational Costs
Currency risk can also lead to increased operational costs. When your business relies on international suppliers, fluctuating exchange rates can make the cost of goods and services unpredictable, making budgeting a challenge.
It’s always worth regularly reviewing your supply chain and considering diversifying to include suppliers in different currency zones. This can help balance out the potential impact of currency fluctuations.
Uncertainty in Investment Decisions
Currency risk can introduce uncertainty into investment decisions. If your business is considering an investment in a foreign country, unpredictable exchange rates can make it difficult to accurately assess the investment’s potential return.
Contract options give you the right, but not the obligation, to exchange a set amount of foreign currency at a set rate on a set date. This can provide a safety net when making international investment decisions. Take a look at some of the various contracts we offer, which provide the type of flexibility you need to thrive.
Impact on Competitive Position
Currency fluctuations can affect your business’s competitive position. If your competitors are better at managing currency risk, they could gain a pricing advantage, impacting your market share.
In this situation, you may well benefit from implementing a dynamic hedging strategy that adjusts based on market conditions and the level of risk your business is willing to accept. SmartHedge – our in-house suite of currency hedging and reporting solutions – can help you maintain a competitive edge.
Damage to Business Relationships
Lastly, currency risk can damage business relationships. If your overseas partners are consistently losing out due to currency fluctuations, they may seek more stable partnerships elsewhere.
Consider setting up shared currency risk agreements with your overseas partners. This allows both parties to share the risk of currency fluctuations, helping to maintain strong business relationships.
Our solutions
Currency risk is a significant challenge for international businesses, but with careful management and the right hedging strategies, it can be effectively mitigated. By understanding the potential impact on your bottom line and implementing appropriate hedging strategies, you can turn currency risk from a threat into a manageable aspect of your global business operations.
Give one of our friendly account managers a call on 020 3773 7402 or visit our website to learn more about how Smart Current Business can help you.
To make sure your upcoming transactions are protected against the risks of sudden market movements, call your account manager on 020 7898 0500 to discuss a forward contract; alternatively, if you’re new, please register with Smart Currency Business today.
