Foreign currency and exchange rate risks
Identify foreign exchange risks
When your business deals in a foreign currency you are exposed to certain risks.
For example, you might find that after agreeing a price for exported or imported goods the exchange rate changes before delivery. Clearly, this can work both for and against you.
Some currencies are more volatile than others because of their unstable economies or inflation. However, the current economic climate is also impacting more stable currencies such as the euro and the US dollar. Your bank should be able to advise you about this.
As exchange rates can go both up and down, it can be tempting to gamble that this will work out in your favour. However, this is extremely risky and could land you with a significant financial loss.
Insuring against the price of currency
It's safer to reduce the risk by using one of the forms of hedging available through a bank. Hedging simply means insuring against the price of currency moving against you in the future.
Hedging may be able to:
- protect your business from financial shocks
- make future cash flows more predictable
- improve your financial flexibility through prudent risk policy
There are many different types of currency hedging and your bank should be able to help you with the best solutions for your business. Other product providers may be available but you should be comfortable that you are dealing with a reputable and regulated organisation.
You could trade overseas in sterling - effectively transferring the foreign exchange risk to the business you're dealing with. Whether this is appropriate will depend on the product in question and the relative bargaining strength of you and your trading partner.
Bear in mind that exchange rates could have an effect on your business' competitiveness even if you don't trade overseas. When a country's currency loses value against the pound, imports from that country into the UK become cheaper, so you may have to respond to aggressive pricing from competitors who source from that country.
Similarly, if a country's currency gains value against sterling, UK exports to that country become cheaper.