How To Manage The Risk When Making Business Transactions In Foreign Currencies

Expanding your business into new markets is exciting. You instantly have access to new customers and suppliers, and if the economy in your home country has stalled, this could be all you need to kick-start your business. However, there are a number of major logistical challenges to be aware of when trading abroad.

If the world operated on a single currency, it would be far simpler to do business, but sadly this is not the case. In Europe we have the Euro, in Great Britain the GBP, and in Canada, the Canadian dollar. When you trade within your own country, it is relatively easy, but once you start trading with countries using a different currency, the situation is a lot more complex.

Foreign Business Transactions

There are a number of issues to be aware of when making transactions in different currencies. As you are probably aware, the value of foreign currencies fluctuates continually, as evidenced by daily updates from a currency exchange Vancouver. This makes it very difficult to do business with foreign suppliers or agree a price with a customer in another county. Whatever happens, one of you will lose out.

Currency is a major business risk. As with any risk, all you can do is work to minimise the effect on the business. Luckily there are solutions available to help you manage the risk.

Identifying Foreign Currency Risk

Firstly, if your business is selling goods abroad, you need to work out how best to price these goods. If you sell them in your local currency, there is no risk to you, but fewer customers will want to buy. Pricing goods and services in the local currency is more attractive to customers, but you carry the risk if exchange rates fluctuate dramatically.

The same issues apply if you import goods. Some components may be priced in a local currency, so if you use these components to manufacture your products, currency fluctuations need to be taken into account when pricing those products.

Some foreign currencies are more volatile than others. Historically speaking, major currencies such as the USD, Canadian dollar and Euro have remained fairly stable, but volatility in the price of oil and political unrest in the Middle East causes peaks and troughs, so there is huge potential for loss on foreign transactions.

Hedging the Risk

It is possible to ‘hedge’ the risk of currency fluctuations. Banks provide a hedging service, which is basically an insurance policy to protect you in the event the price of a currency moves in the wrong direction. This will reduce the risk of sustaining significant financial loss on larger transactions, although it won’t reduce the risk entirely.

Currency fluctuations also make it difficult to forecast the price of a foreign order book, since it is impossible to know in advance how much future orders will be worth.

Trading abroad – and even trading only at home – is always going to be affected by currency fluctuations. You can’t remove the risk, but you can learn to manage it more effectively.

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