One major factor impacting our pandemic recovery is our attitude to risk. Some we want to avoid it, some will embrace, either way we need to make a conscious decision towards risk management.

Following our successful Virtual Summit, we look at one priority risk area in more detail – Foreign Exchange (FX) risk and how to manage it.

Identify and quantify your risks

Look within your business to see where the currency risks are, and whether these can be offset. For example, any sales made in Euros could be offset against Euro costs. If there is still an exposure, this is where products such as Forward Contracts and FX Options can be considered in order to provide protection against the risk. Currency risk can be divided into three types:

Transactional Risk

This risk arises when a business deals in a country that differs to their base currency, for example, exporting overseas goods and services or importing them.

The business will be exposed to currency volatility, especially if a price has been committed contractually and a deal has been signed.

FX exposure in your business?

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Businesses that have a transactional exposure to the currency markets can differentiate between committed and forecasted exposures. A committed exposure is when the price for a good or service in a foreign currency is known and contracted. Therefore, any movement in the exchange rate has a direct impact on their profit or cost unless hedged.

A forecasted exposure is when a business looks to the period beyond the committed period to see what their requirements may be. Confidence levels into forecasted periods can vary largely and it is normally the case that the further out a business forecasts, the lower the confidence levels.

Translational Risk

This risk arises when a business has an asset or liability overseas on their balance sheets, which can then go up or down in value dependent on movements in exchange rates. These risks can apply in businesses of all sizes and are not confined to larger, more sophisticated businesses.

Economic Risk

Another risk can be classified as Economic Risk. This is the movement in the exchange rate which can give a business competitive advantage when competing for a particular market, however, it is extremely rare to hedge this risk.

So whether you are consciously managing risk, getting advice and building policy, or feeling your way through the recovery, we need to get our arms around risk management for the foreseeable future.

This article was written by John Freeme of XE

XE is the third largest money transfer business in the world. It strives to offer the most simple, reliable, and friendly money transfer service. Find out more here.