Foreign exchange risk management

Risks for International trading business:

 

1

Transaction/Cash Flow Risk - this type of risk occurs when a company expects to receive payments (export contracts) or has the obligation to make payments (import risk) which are denominated in a foreign currency. Between the time a contract is made any payments are settled, exchange rates can fluctuate significantly resulting many times in losses.

2

Economic/Operating Risk - this type of risk arises when a company loses its cost competitive advantage versus other local or international market rivals. Currency fluctuations can make company’s goods more expensive and less competitive which leads to loss of market share.

3

Translation/Accounting Risk - this risk arises when a company’s financial statements are damaged due to unfavorable currency fluctuation. If cash flow losses are incurred and a company loses future sales this automatically leads to worse financial results.

 

Benefits of protecting against currency fluctuation risks

*Protection from cash flow losses

*More competitive market position

*More predictable financial results

 

Why Trade24?
  • Access to the foreign exchange market
  • User-friendly and easy to use platforms
  • Personal professional assistance & hedging strategy
  • Leverage - the ability to open larger hedging positions with far less available funds in your account
  • Very competitive trading conditions - very tight differences/spreads between buy and sell prices
  • No commission or additional charges

 

Example:

Imagine that on 5th Jan, 2016 a Polish exporter signs a contract with a German importer for the production and delivery of 100 machines each at price of 10.000 euro (EUR) or a total of 1.000.000 euro with a delivery date and payment in 3 months. On 5th Jan, 2016 the exchange rate of EUR/PLN = 4.3, so on that day the Polish exporter assumes that in 3 months he will receive around 4.300.000 zloty. The purchase of raw materials, production and transportation (all done locally in Poland) are estimated to around 4.000.000 zloty. So, the financial forecast is for a profit of 300.000 zloty which was previously set as the absolute minimum profit on such order. However, in 3 months the exchange rate moves to EUR/PLN = 4 and the German importer pays 1.000.000 euro, which however can be transformed to 4.000.000 zloty, which is a less valuable payment denominated in local currency terms compared to the previously expected one. This also resulted in a zero profit, which seriously damaged the financial result of the company. In addition, imagine that the Polish exporter one more purchase order from the German importer, but in order to make any profits this time, assuming the new exchange rate, the Polish exporter needs to increase the price to 10.750 euro per machine in order to meet the minimum profit requirement set earlier. However, this time the German importer decides to not make the second purchase at the new price, but buy the machines from an Italian exporter instead who offered a machine at the price of 10.500 euro each. So, in this simple example, due to currency fluctuations risk, the Polish exporter suffered 1)cash flow risk from the lower payment denominated in zloty 2) economic risk which seriously affected the company’s competitive position on the market and loss of future sales 3)accounting risks due to the sales/revenue and net profit results. However, if the company had foreign exchange risk management tools in place, all this wouldn't have happened and the company would have in a far better financial position.

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