For any business looking to export internationally, a clear understanding of the company’s objectives and the resulting foreign exchange (FX) risk management implications is imperative.
What does exchange rate risk management mean for exporters?
When considering exporting, a key concern for any business is to manage and maintain the margin priced into the goods or services, even when it is sold in a different currency – which can be especially difficult in light of continuing wider economic uncertainty. When faced with the dual challenge of managing both the demand outlook and the currency risk, the main aspects to consider are:
- setting budget rates and contract conversion rates at achievable levels in the market whilst remaining competitive
- hedging where appropriate to lock in/maximise margin
- managing currency risk on an ongoing basis through continued monitoring.
The underlying aim of managing FX risk in this manner is to build more flexibility into operations to remain agile and be able to respond to events.
Large moves in the value of currencies are not uncommon and make the effective management of FX exposures more challenging. Furthermore, the speed and scale of currency fluctuations have undergone a step-change in recent years, and no currency (with the exception of pegged currencies) has been immune to this increased volatility.
Given the globalisation of supply chains, this volatility has been most marked in emerging market currencies (including Latin America, the Far East and Eastern Europe), making it even harder to manage. The South African rand, for instance, has seen a 30% fluctuation in the last two years.*
* Bloomberg, 2012.
At Barclays, we have seen a marked shift in behaviours among our clients, with a move away from the traditional reliance on spot and forward contracts towards greater use of a more balanced mix of FX options together with spot and forward FX contracts.
Although there has been some liberalisation over recent years, many emerging markets still apply some form of exchange controls, and these can vary significantly in terms of impact. In Brazil, restrictions mean that although it is relatively simple to invest in the country, often you cannot easily repatriate funds. This means that businesses need to ensure that the legal set-up, including any contracts they sign, take exchange control requirements into consideration, including allowing for overseas payments.
Companies must also be aware that policies change. Kenya’s currency restrictions have already changed three times in 2012 making it even more important to have a banking partner who truly understands the nuances of the domestic market and can support with the most up-to-date guidance on country and counterparty restrictions.
Managing currency risks has always been a complex and challenging task for businesses of all types, but the continued heightened market volatility has compounded the difficulties in getting it right.
Now more than ever it is important that, in advance of exporting to new territories, companies engage with market professionals who have a deep understanding both of the dynamics of the industry and of what FX risk management can deliver. Although there are challenges and risks associated with exporting internationally, through careful planning, strategic partnerships, and an on-going risk management strategy, these risks can be mitigated and new sources of revenue realised. Barclays is well positioned to help in this regard and we’d be happy to discuss your requirements.
This article is taken from EEF’s ‘Export Insights’ October 2012 publication
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