Currency fluctuations create uncertainty and can quickly turn a solid profit into losses and leave revenue projections to the whim of the currency market. “It is surprising that many corporates do not have a strategy for handling their FX flows”, says Niels Christensen, chief analyst at Nordea Markets.
Christensen is speaking from 25 years of experience in the FX market and 10 years of servicing Nordea corporate customers with FX-related challenges. Globalisation has led to Danish corporations being able to find more international customers for their products and services. This increases significantly the need to make a sound assessment of currency risks in the international trade environment.
New market entry, new currency risk
As corporates grow, and entry into new markets becomes a desirable option, the currency fluctuations also become a risk factor to consider. “My experience tells me that companies often look to a currency strategy after a negative fluctuation has hit their result. My advice is that as soon as the corporate opens up for an external market, a currency strategy should be in place,” says Christensen. This will make it easier to add new markets as the business grows whilst being confident that currency risks cannot offset the growth pace of the corporate.”
Cost of production, a currency exposure
The cost side is equally important as more and more corporates take advantage of lower production costs abroad. “But do not forget that the production cost can be an exposure to a currency that is more volatile than the local currency,” says Christensen. “For some of our customers with production set ups in both Europe and Middle East, the currency exposure is a considerable risk that they need to manage.
“Of course, a currency strategy in those scenarios is a must,” he says. “Usually the responsibility of managing this risk falls on the corporate CFO and a well-planned currency strategy is a great tool to minimise risks and secure a healthy growth for the business.”
Before you get started, you need to consider these 3 things
Have you mapped all the currencies your corporation is exposed to?
Have you reviewed the cost side as well as the revenue side?
Have you formed a short- and long-term currency hedging strategy?
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