Reducing currency risk is a critical part of the global business community and our global economy. See what Jenny Holt contributes in her article today…good advice for any company investing or competing in global markets…
4 Strategies To Reduce The Effect Of Currency Risk
Written by: Jenny Hold
You might be wondering whether the interconnected nature of the world is a good or a bad thing for business people and investors. Connectivity can be seen as a good thing and some will call it a blessing to the business community. However, this is only true if you can learn how to remain profitable by understanding the importance and the risks involved.
Currency risk is the unpredictable fluctuation of currencies that occur from time to time. While you cannot avoid these fluctuations, you can manage the effects of currency risks that come with it. It is easier for large businesses and government agencies to navigate the impact of currency risk as compared to a small business. Investors can accept the risk and hope for the best or they can take the right measures to eliminate it.
Check out these five strategies to reduce the effect of currency risk.
Diversifying your investment
As you invest or market your brand abroad, ensure that you are not doing so only in one country. Familiarize yourself with the factors that affect your business in other countries and expand. Keep your overseas investments low, Experts suggest a 25 percent rate Work in countries where their currency is pegged to the dollar.
Work with Countries with Stable Currencies
Choose countries whose currency is strong and with predictions of a stable rise as such a nation will have low debts and a good GDP. High debts often result in inflation and devaluation of currency when compared to the dollar. Choose wisely and do your due diligence.
Matching Up Cost with Revenue
If you have been running one department in a different country whose currency value does not match the dollar, then consider moving that department to another country whose currency is almost of equal value to the dollar. This will involve a lot of logistics, and you can end up losing your competitiveness as a brand so evaluate other methods fast before settling on this one.
Hedging the Risk with FX Derivatives
If you are a UK-based company and have a revenue generation operations in the United States, you will generate revenue in U.S. dollars that will need to be transferred to British pounds. As a result, your actual revenue may be worth 5% less when you exchange it back to pounds. Hence, it is important to use a currency risk hedging strategy with financial derivatives when operating overseas.
Hire experts to help you remain profitable as world currencies change over time. Use the complicated investment like futures and options and to hedge the currency risk associated with your bond or equity investment.
As Warren Buffet says, don’t invest in something you don’t fully understand. Major corporations have risk management departments that work to ensure that losses are avoided when the dollar falls or rises against a foreign currency. However, small business owners must start by understanding what currency risk is and how it can affect your venture. Only then will you be able to take the proper actions and reduce the risks.