Foreign Exchange Risk - FX Risk

There is good saying that I recently saw in the Internet. They said that a good writer will never run out of topic to write. Maybe I am not a good writer but a fresh idea always pop up in my mind. Today topic actually just show up this morning, an Account Officer came to my office to discuss about Foreign Exchange Facility. If I am not mistaken, two years ago I had experienced the same case and close the deal smoothly and made profit. Some people always find it hard to understand when it comes to number especially about Currency Exchange, so I would like to share some information regarding how we manage to identifying and managing the risk, we usually refer the word to FX Risk.

Identifying the risk

Business that trade or have operations overseas are likely to be exposed to foreign exchange risk arising from volatility in the currency markets. The most common cause of its exposure arises from having to pay invoices for imported raw materials priced in a foreign currency or receiving it for your exported finished goods. However, exposure can also arise from your competitors having cost base and/or selling their products in a foreign currency. The impact that exchange rate fluctuations have on profitability will vary but in many cases it can be significant.

Managing the risk

There are three basic alternative methods to manage FX Risk

1. Do nothing and buy or sell your currency in the spot market. You act on the day you want to buy or sell. This approach means you will not know how much money you will need to pay or receive until the day in question – this can be a high risk strategy as the exchange rate moved significantly.
2. Lock in to fixed rates. As soon as you become aware of a need to exchange currency at a future date, then you can fix the exchange rate by booking a forward contract. This approach provides certainty but you could suffer an opportunity loss if rates subsequently move in your favour and you are obliged to transact at the forward contract rate.
3. Use flexible products. A currency option will over you to the potential for upside benefit if rates move in your favour – like a spot deal, but will provide protection against adverse rate movements – like forward contract. For this flexibility commonly Banks will charge premium.

I fully understand that there are many words such as Spot, Forward that will sound strange to someone who are not involved in Economy or Banking sectors. I promise you that I will try to explain it later. There are still a lot of good article and topics in http://contentwriter-id.blogspot.com/ , you can visit them to read all interesting story all around the world from the writer perspective. If you fell confuse or need to ask a questions, I am glad to help. Kindly post your comments and you will get an answer soon. Good day every body.