Added: 02/16/2006 |
Think and organize exchange risk managementYour business is open to risks from movements in competitors' prices, raw material prices, competitors' cost of capital, foreign exchange rates and interest rates, all of which need to be (ideally) managed. There is nothing wrong with risk. It is the lifeblood of business and the test of entrepreneurs and managers. What matters is how you handle risk and the culture in which you operate.
Do you know the risks to which your business is exposed? Which exposures are big enough to worry about? If there is anything you could do to protect against it? What it would cost to reduce or hedge your risks?
Once you have the facts it is decision time. You can choose to do nothing or seek to reduce the exposures or to hedge them in whole or in part. The unforgivable sins are to fail to consider the risks or fail to act on any decisions.
The risk culture of your business is critical and must be established at the most senior level. Above all it calls for honesty. Too often individuals are criticised for decisions that, at the time, were in tune with the organisation's perceived appetite for risk.
Responsibility for exchange risk management rests at the top and if the senior executives do not understand what is going on they must find out. It would be nonsense to suggest that they should know every detail of all that is happening in a business but their job is to ensure adequate systems and controls are put in place.
The foreign exchange market has witnessed frequent bouts of excessive volatility. At times it has seemed too many businesses that they have been helpless in the fight to control the associated risks which arise when exporting or importing goods and services. Future cash flow projections, profitability, competitiveness and the ability to service debt can all be impacted by foreign exchange volatility when paying or receiving foreign currency.
All businesses trading overseas and increasingly in domestic markets, will have some exposure to exchange rate movements either directly or indirectly. Whilst exposure to exchange rate movements may be an inevitable part of everyday activity, the risk arising from such exposure can be controlled.
Some companies have leading exchange risk management and a team of specialists available to help manage these risks. Providing exchange risk management is only a small part of their service that understanding your business and your requirements is a prerequisite to manage currency risk.
A dedicated dealer will help you form a view of the market by providing information from a number of economic surveys, reports and currency forecasts, as well as keeping you informed of market events as they occur. Their aim is to help you create the strategy of exchange risk management that is effective and that puts you in control.
The following Risks will be considered.
1. Risk to the Exposure or Value at Risk (VAR).Given a particular view or forecast, VAR tries to determine by how much the company?s underlying cashflows are affected. The VAR is the answer to the question, ?If the Rate actually moves to xx.xxxx, how much Profit/ Loss does the company make??
2. Forecast Risk.What is the likelihood of the rate actually moving to xx.xxxx and what is the likelihood of a forecast going wrong. It is imperative to know this before deciding on a Benchmark and devising a hedging strategy.
3. Market and Transaction Risk.This will take into consideration the risks attached with each particular market and the likelihood of a transaction not going through smoothly.
4. Systems Risk. The risks that arise through gaps or weaknesses in the Exposure Management system.
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