Managing foreign exchange risk is a topic that affects all companies with international import or export activities and can have a significant impact on their commercial margins. It is surprising to note that more than 60% of companies do not have a hedging policy. Moreover, at the moment, the Covid-19 sanitary crisis directly impacts the cash flow, the margin, the turnover and the competitiveness of companies. It is necessary to control currency risk in order to optimize or save cash. Managing your foreign exchange risk is better and less expensive than a bank loan or a government guaranteed loan (GGL).
However, a few simple actions can be taken to define a framework for monitoring foreign exchange risk in order to implement a hedging policy.

1- Knowing your risk

Foreign exchange risk is the uncertainty that fluctuations in currency exchange rates bring to bear on the financial or economic performance of companies, regardless of their size, from multinationals to very small businesses. It is therefore essential for a company to know its exposure to foreign exchange risk. To do so, a qualitative and quantitative analysis of foreign currency cash flows on a monthly basis allows to understand and measure the effect of foreign currency fluctuations on the company’s profitability. It is relevant at this level to define a threshold of significance of the risk for the company in order to react quickly if the exposure of the company evolves (new commercial contract, change of supplier, acquisition of a company abroad…)

2. Define a management policy


The next step is to set up the framework of a management policy adapted to the company, which will define :
– the persons responsible for the management of the exchange rate risk (CFO, Treasurers, …)
– the management objectives,
– the covering instruments that can be used,
– the tools used and the reporting methods.

3. Coverage strategy

In the case where the profitability of the company is not significantly affected by exchange rate variations, the hedging strategy to adopt may be :
– not hedge the exchange rate risk and convert the cash flow into foreign currencies at the cash flow at the time of receipts or payments,
– implement a hedging strategy in the short term, using forward contracts, when issuing or receiving invoices to limit the volatility of the accounting exchange rate result.

On the other hand, when the exchange rate risk has a significant impact on the company’s results, not hedging is no longer an option and a short-term hedging strategy will very often prove to be unsuitable.
A strategy should be developed to manage the entire risk with a minimum percentage of hedging, with alert levels determined in advance so as to know when to intervene and adapt the hedging strategy when the currency exchange rate has changed, whether in an unfavorable or unfavorable direction favorable or unfavorable.

In the day-to-day monitoring of the hedging strategy, the manager must have at his disposal a tool that meets his needs:
– monitor his exposure and his hedging portfolio.
– have a real-time vision of its exchange position to be reactive when making a management decision,
– be informed in real time when alerts (stop-loss or take-profit) are reached,
– have a simple and effective reporting system that highlights indicators important for decision making.

While the work of analyzing foreign exchange risk can be complex to set up initially, the results can only be beneficial for companies. It is essential for companies to remove uncertainty about their exposure to currency risk in order to cope with the uncertainty of the foreign exchange market in .

If all these notions seem complex to you, do not hesitate to contact DeftHedge.

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