As an exporter, you face risks with floating or fixed exchange rates with each transaction. You should carry out a comprehensive analysis for all your major markets when carrying out business forecasts. First, check the range of exchange rate variations over the past years, and then adopt a minus or plus range around the present exchange rate. Secondly, recalculate the bottom line for every market using the low and high calculation. That will give you a hint of the exposure of your company to exchange rate fluctuations in a certain market.
If there’s a significant effect on your bottom line, it’s important to consider any of these hedging strategies.
You can buy an option to purchase at a given price if the rate of exchange surpasses a particular level. That is less costly than a forward agreement. However, it exposes you to currency exchange risks until you attain the strike price.
You can also buy currency on the stock market to line up with your projected collection date.
If there the market risk is huge, you can also consider keeping the pipeline small to reduce your exposure in a certain market. Again, if you have a resident operation, a subsidiary or a warehouse, you can keep stock to the minimum. You can limit the duration of your product’s price quotes as well. For instance, instead of three months, you can give the day of the transaction and ask for prepayment.
For those currencies that are one cannot freely trade with, you can ask the payment of your products or services either in dollars or at the resident currency corresponding to the spot exchange rates on that day the contract comes to an end. By doing this, you will not only reduce your risk, but it will also shift the risk to your customers, and this can cost you sales especially if your competitors have the same requirement. Adopting a dollar-denominated trading strategy does not minimize the risk, but it limits your chances to expand markets as well.
If your business either earns income from other countries or incurs costs in some other countries, you perhaps have some exposure to global exchange rate risks. You can suddenly see your costs spiraling or revenue decreasing due to international political events beyond your control. Most of these exchange rate risks are pretty small, and you can integrate the margin to manage those risks.
As a small trader, you might not know a lot about international currency fluctuations, and you might not want to know much. However, if you have any global exposure, your company will be affected by these variations in one way or another. So, it all boils down to this; you can mitigate exchange rate risks, and not eliminate them. With these strategies, you will be in a better position to know all the effects of global currency movements and take the necessary action to mitigate them.
If you are interested in even more business-related articles and information from us here at Bit Rebels then we have a lot to choose from.
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