What problems or issues can arise from foreign exchanges?
As I said earlier there are risks involved in foreign exchange. The foreign exchange market trades over a trillion dollars daily and rates fluctuate every 24 hours. For these reasons it is highly recommended that a business owner understand his or her costs going into a transaction. In this way, you can design a plan that minimizes risk and maximizes reward. Once a business gains experience making and receiving payments in foreign currencies, then additional tools are available to assist with timing and budgeting strategies. I think the last issue related to foreign exchange trading is the additional accounting expertise required when reporting trading activities.
As I previously mentioned, foreign exchange problems result from companies not anticipating changes that may affect their non-dollar receivables or payables. They may also have an asset that they may need to purchase in a foreign currency at some point in the future. If they don’t lock in the rate today, the cost of the asset may be more than they were initially expecting if the currency strengthens. For example, if a company is purchasing equipment from Germany in euros in six months, they could hedge or lock in the rate today to eliminate any foreign exchange risk of the euro appreciating. If the euro appreciates relative to the dollar, the company will not be affected by the increase in the euro. If they choose not to hedge, then they may end up paying significantly more, as the strong euro will increase the cost in dollars.
What are the consequences a company faces if it doesn’t monitor and/or contain this?
The most significant consequences of ignoring foreign exchange in my opinion are lost opportunities. Very often domestic companies purchase goods overseas for the express purpose of cost savings. By paying in dollars, these companies may be leaving money on the table. Conversely, many American companies sell overseas to find new customers, but with the added risk of doing business abroad should come added rewards in the form of foreign exchanges.
Should a company take this on alone? Where can it turn for assistance?
Again, working with your trusted financial advisers and institutions is key. If you don’t already have one, find a bank with a strong foreign exchange presence and a dedicated local team of experts available to answer questions, assist with planning and execute your trades daily.
Bart Brown Jr. is a vice president and principal relationship manager with Wells Fargo Bank. Reach him at (713) 319-1764 or [email protected].
