If You Don’t Manage Your Risk, You’re Taking a Risk

Whilst the world of currency risk and hedging might seem complex and intimidating, if you are not correctly protected (hedged) or aware of the factors that can affect currency risk, then you're chancing potential losses.

Managing Currency Risk

As a business operating in more than one currency, it can be difficult to fully understand not only how to protect yourself from currency fluctuation, but also what determines the best rate for your needs at any given moment.

At Central FX we help our clients to manage their currency risk and international payments by understanding the 4 core factors that are unique to their business and the 3 common currency risks to avoid.

The 4 Factors that Define Your Risk

There are 4 factors that define your currency risk- your “exposure” to any fluctuation in the market. Understanding these elements is crucial to understanding your currency risk and thus creating an effective strategy.

1. Timing – When do you need to exchange one currency for another? If you have a limited timeframe for exchange currencies, it can limit your choices to avoid currency risk.
2. The amount – How much are you exchanging? The more you need to exchange, the greater the potential risk and the greater the need to be correctly protected (hedged).
3. Margin – What’s your profit margin? The smaller your margin, the higher the need to monitor and manage your currency risk to prevent losses.
4. Forecasting – How accurately can you forecast? The accuracy of your forecasting will influence your currency risk strategy.

What Moves the Price of a Currency?

The activity of buyers and sellers in the marketplace – or “liquidity” – drives the market and dictates the buy/sell price for any given currency

The buyers and sellers in the marketplace are driven by a requirement to trade (they need the money now) or to speculatively trade in the hopes of making a profit. Speculative trading is in turn driven by the political climate, the economic climate and unforeseen circumstances.

How to Get the "Best Rate"?

The best rate is not necessarily a fixed number – any given provider can supply a competitive rate. The “best rate” is about finding what’s right for your business.

It will be a culmination of understanding the needs of your business and understanding what moves the markets, and if there are any ongoing or upcoming political/economic events that may cause volatility in the market.