Foreign exchange risks are trade risks posed by a change in exchange rates. Every year a lot of companies face losses due to this factor. There is a proper policy that should be followed to prevent these losses; this is called FX risk management where FX stands for foreign exchange. These risks are unavoidable but proper planning can help in minimizing them.
Here is a guide that can be helpful in creating a good program for such purposes.
- Analyze your business operations to identify the areas that are at risk
Gather an expert team and analyze your business to identify the areas that are more prone to FX risks. When you are done, make a list of them.
- Calculate the risk exposure
Based on the list created earlier, calculate a quantitative result of all the confirmed and unconfirmed risks. This will provide you with a sneak peek in the amount of risk coverage you might need.
- Hedge the risks identified
Next step is to hedge the risk that you have calculated till now with the use of special financial programs/tools to lock down the FX rate. This will help you a lot if the exchange rate changes at the time of payment. Banks provide FX facility to the companies, which is a financial tool that helps in hedging.
- Create a FX policy and follow it
Create an FX policy according to your findings and conclusions from your study and follow it, make sure the hedging isn’t eating a lot of capital as that may pose a threat to your business later.