It’s clearly a global marketplace, and companies are doing whatever they can to expand and thrive in overseas markets. But you can’t just set up shop overseas and start doing business. You need a plan, a strategy.
Foreign exchange strategies are opportunities to increase profits and/or savings from business overseas. Companies doing business internationally may occasionally have the opportunity to transact in a foreign currency. This is an excellent opportunity to experiment with exchange rate risks and rewards. In this way, you create a possible exchange rate gain. And, the strategy works equally well for buyers and sellers.
“A foreign exchange strategy is one that allows a company to both buy and sell foreign currency and also manage foreign exchange risk to help protect against adverse foreign exchange changes,” says Bart Brown Jr., vice president and principal business relationship manager with Wells Fargo Bank. “For example, if a company has foreign payables or receivables, they can hedge against an adverse move of the foreign currency rate against the dollar.”
Smart Business spoke with Brown about foreign exchange strategies, how to implement them and what risks come with them.
How does a company go about implementing a foreign exchange strategy?
A foreign exchange strategy will require three key elements. First, sufficient profit margin (or cost savings) must be built into the transaction to cover any variations in exchange rates and fees. Second, it is necessary to have a financial resource with access to foreign currencies at fair prices. Lastly, with the help of a foreign exchange adviser, determine the timing of currency trades and final payments.
Working with a trusted financial institution that has international capabilities is the best way to implement the strategies. Quality banks will have foreign exchange trading desks and local specialists that work directly with businesses of all sizes to help assess their needs and manage foreign exchange risk.
If I’m the CEO of a company, why should I care about this?
Many overseas customers are all too willing to accept U.S. dollars, as they understand and appreciate the strength of the greenback. So, why not participate in the risk and reward of foreign exchange trading with your customers? Paying for goods and services in foreign currencies is easier than you think, and it may generate additional profits and/or cost savings to your business. At the very least, when conducting business abroad, it is wise to understand the impact of exchange rates to your bottom line.
CEOs should understand and be aware of how foreign exchange rates and translation gains or losses can impact their profit margins. It is important for them to understand how a foreign payable or receivable in a foreign currency can be worth more or less than what they are expecting to potentially affect their bottom lines. For example, if a company is expecting receivables priced in euros and the currency depreciates relative to the dollar, the receivables will be worth less, as the foreign currency will purchase fewer dollars.
