International Trading raises Risks – The Harsh Facts of Life
The net result is that companies tend to make a defined hedging choice – either all or nothing – both being equally risky.
It is well known that forex is cited as one of the major factors behind unexpected year end losses. Whilst the larger companies are better positioned to sustain unexpected losses and also have the funding to assuage the risk of losses by having their own Treasury Departments, the problems for the smaller companies are just as real but beset by the fact that they are not so resilient in the face of unexpected losses, and do not have the funding to protect themselves with a full time Treasury Management Department.
The presence in larger companies of a fully staffed Treasury Department is testimony to the need for management of currency risk. Treasury skills are, however, expensive, highly technical, and usually focused on a specific niche of experience and speak a different language.
Take comfort: there is a solution to this dilemma.
As so few companies can justify funding an in-house Treasury the solution is to acquire a tailored, proportionate Treasury service which will provide the expertise to protect smaller companies and enable managed international expansion.
Manage Your Foreign Currency Risk
Companies need forex treasury skills that are attuned to the needs of their business. The risk appetite of the company needs to be assessed which will entail understanding its markets, the activity of competitors, price elasticity, time scales and cycles of the business.
It is also essential to understand the accounting and reporting systems, what can be provided, what is missing and particularly what is needed by the executives and the Board for decision making, monitoring and control. Companies need a trusted person who understands the markets, can monitor them actively and relate to the risk implications on the business. They also need an accounting savvy person who can ensure that profit and cash flow are correctly recorded.
Combined business, forex and finance skills are critical for successful forex management.
The Banks and Brokers will advise what the market is doing at a moment in time and as they are transaction dependent for their income, they work hard to get companies to trade, often suggesting risky or costly derivative solutions.
Independent Advice - Risks
It should be remembered, however, that companies which trade currency to earn funds are not able to advise, so some set up “independent” of the trading company.
The concept of ‘independent advice’ within a financial services context is, however, rightly questioned and an individual or company should only be recognised and trusted as being independent if there is truly and absolutely no vested interest in any transaction occurring.
Truly Independent Advice
SMEs require advisors whoare truly independent of any provider and not constrained by being on a transaction based commission and who instead charge a cheaper monthly retainer for a tailored service. It is vital that any advisors focus on the service not on the transaction and that they:
The Ideal Forex Solution