In the current economic climate, many businesses are finding their risk management strategies tested to the limit. This has led many managers to rethink the methods by which they assess and mitigate against financial risks.

Although the financial climate presents many unprecedented challenges, there are still fundamental processes that businesses can employ to help manage their risk exposures.  In particular, foreign exchange (FX) is an area where risks, once identified and understood, can still be controlled.

By asking yourself some simple questions regarding your international operations, sales and procurement activities, and identifying whether and when these are likely to change, you can begin to recognize where your FX risks lay.

If you have identified key transactions in your business cycle where FX rates could fluctuate significantly, it may be worth considering achieving greater certainty of exchange rates at a future date by booking a forward exchange contract.

This approach eliminates the exchange rate risk and provides a fixed rate to cover your exposure.

Although, it may be worth considering the level of exposure you are prepared to commit to as this option could also mean that you’re not able to take advantage if rates subsequently move in your

favour, as you are obliged to transact at the forward exchange contract rate.

Conversely, your business strategy may favour a more flexible approach to FX. In the spot market, the amount of a particular currency required, the exchange rate and the value date are all fixed on the day a deal is done and normally settled two working days after the exchange rate has been agreed.

The benefit of this option is that it provides you with the ability to take advantage of favourable currency market movements. However, it can also be a high risk strategy as it doesn’t provide any protection against adverse rate movements and negative market conditions.

A currency option offers you this flexible means of obtaining protection against adverse exchange rate movements – like a forward exchange contract – whilst at the same time allowing you to take advantage if rates move in your favour – like a spot deal. These solutions may incur a premium and it may be worth exploring alternative structured solutions which offer similar protection and the potential to participate in favourable spot rates to a predetermined point.

In these uncertain times, the ability to protect against all eventualities has become critical and FX risk management is a key part of the mitigation process.

Turning the Corner.

We are committed to supporting businesses in this challenging market by providing networking events, information and practical guides to help them make informed decisions on the challenges they face. One of the ways we are doing this is through our Turning the Corner campaign. Please visit the website at the following address to find out more:

www.barclayscommercial.com/turningthecorner

For further enquiries please contact the East Midlands Team on 0115 9806734