You can limit your business’s foreign exchange rate risk—and help protect your profits—when the foreign exchange market is volatile.
Most businesses do this by using one or more hedging techniques when they’re making or receiving foreign payments. Hedging can help soften the blow of any wild forex market swings, minimize your losses, and even help you profit from certain market moves.We talked about how to manage exchange rate risk with external techniques in a previous article. Another way to hedge is to use internal exchange rate risk management techniques.
What are internal exchange rate risk management techniques?
Internal exchange rate risk management techniques are actions taken within your organization, without help from any outside entity. Some examples of internal techniques include:
Price variation – increase your prices to cover exchange rate fluctuations.
Invoicing in your own currency – to put the risk of currency fluctuations on the buyer.
Matching – having two transactions, one to purchase and one to sell, in the same currency. These transactions are usually in similar amounts and will offset each other. Matching can also be done with several transactions that add up to similar amounts on both the sales and purchase sides.
Netting – offset your exposure in a currency during one transaction with another transaction in the same or another similar currency. This technique is often used in large companies that have many transactions happening at any one time. For example, a company may export corn to France for $1 million euros and at the same time, import avocados from Mexico for $1 million pesos.
Leading and lagging – timing payments in foreign currencies to try and take advantage of currency movements. Leading is paying in advance, and lagging is paying later, sometimes after the due date. Businesses that use these techniques try to anticipate which way a currency will move and make their transactions accordingly.
Asset liability management – moving cash inflows into stronger currencies, or paying with funds in weaker currencies.
Internal exchange rate risk management techniques are straightforward and easy to understand. This makes them simple to explain to others, which is beneficial if you need to get others on board with the idea. They are also fairly simple to implement. You don’t need any additional accounts at outside financial institutions, and these techniques can be done with only a small amount of market analysis.
Internal techniques certainly should be considered for your transactions and incorporated into your business plan where appropriate. However, to be effective, they require market knowledge, monitoring, and effort from your team. For the greatest results in protecting yourself from exchange rate risk, you should also incorporate external risk management techniques like multi-currency accounts, forward contracts, and structured options into your business.
Help getting started with exchange rate risk management
Analyzing the foreign exchange market is a complex task and time-consuming for anyone. When you’re trying to run your own business, it’s even harder to stay on top of daily market moves.
To get the best results, without investing time and energy you don’t have, you should enlist help from an external partner you trust. Having an expert like Monex USA on your team to advise you about the market and how to preserve your profits gives you the opportunity to focus on your business.
Monex USA is a global leader in foreign exchange and risk management solutions. As Bloomberg’s number one currency forecaster for the G10 currencies, our award-winning FX experts have decades of experience and can help you make sense out of the forex market.
We’re here to help you with foreign currency exchange risk management and decide on the appropriate hedging techniques for your business. Use the latest technology and enjoy our exceptional customer service.
Ready to get started? Contact us to talk to a foreign currency expert today.
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