Transacting values in the billions every day, the foreign exchange market is one of the biggest in the world. However, it is one that remains confusing to many businesses, especially small and medium-sized companies, who often end up entering the market blindly. Not only is this avoidable, but it results in exorbitant fees being paid for even the smallest of deals.
The key foreign exchange risks are:
There are numerous risks related to foreign exchange, regardless of a business’ size, with three of the most considerable being:
- translation risk
- transaction risk
- economic risk
All of these have a substantial impact on profit margins and are particularly hazardous for small businesses as their banks are more unlikely to offer currency hedging solutions.
Translation risks happen as companies with global dealings translate their intercontinental assets and liabilities as well as financial statements from foreign currencies to local currencies. This subjects them to foreign exchange risk, given that exchange rates remain prone to ongoing fluctuations. Monetary and political uncertainty, plus other substantial international events like the COVID-19 pandemic impact money markets in a big way. If a company runs in multiple foreign locations, it should endeavor to lessen potential risks. One way this can be done is through hedging, which offsets money fluctuations in foreign markets. However, it is unusual for this activity to result in business profits, so consider the priority of a successful hedge as an activity to safeguard company losses. Researching money transfer providers that suit a business’s requirements is important if SMEs want to save money in their foreign exchange. Businesses must also acknowledge their current situation, the risks and stay alert to market fluctuations.