What is Foreign Exchange Risk Management?
Foreign exchange risk management is the management of the risk created by the creation of the exposure to the possibility of the rise or fall in the value of a currency.
If your firm buys or sells goods overseas, it is probable that, by doing so, you will create an exposure.
By “hedging” that exposure you eliminate the risk by creating a known value for the currency in your accounts.
Learn more about Currency Risk Management
Exposure to foreign exchange risk may be a one-off for your firm or a part of the day to day accounting process. If we look at the process historically, as soon as it was decided that the firm would enter an import or export market, the businesses board should agree on a hedging policy. This outlines the parameters of the amount of risk the firm is willing to take and the products that are acceptable to hedge that risk.
In most cases, the board will agree that 100% of the risk should be hedged and approve the use of forward contracts.
Once the hedging policy has been approved and minuted it usually falls to the accounting section or whoever is designated to make or receive payments to carry out the hedge. Traditionally it would be the firm’s bank that would be asked to make the FX trade but latterly payments firms like CurrencyTransfer.com have come to the fore.
By buying or selling currency for delivery on the date it is due to be received or paid, the firm will know with certainty the amount it has to pay or receive in its local currency thus eliminating the risk that the currency could appreciate or depreciate in the time between contract and payment.