The management of
exchange rate risks

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“I am more efficient and less stressed since I started using DeftHedge. I make the right decisions easily… the results are immediate.”
Julien, Chief Financial Officer

When you carry out international transactions, you are exposed to various risks, particularly exchange rate risk. Indeed, in the short or medium term, exchange rate fluctuations between two currencies can be significant and thus have a significant impact on the invoice and competitiveness of the products sold or purchased.

In order to deal with exchange rate uncertainty, it is therefore necessary to adapt its strategy as well as possible and to anticipate exchange rate trends. We return here in detail to exchange rate risks and the importance of taking them into account in order to optimize your management.

To help you in your hedging strategy, DeftHedge offers you its currency risk management tool which will allow you to set up a totally personalized strategy. Our web application has been designed to offer companies a simple and fluid use.

With the different functionalities at your disposal, you will be able to improve your positioning and adapt your strategy to the changes in the exchange rates of different currencies. In order to be serene in this market and have the best strategy, DeftHedge is the ideal ally.

What is foreign exchange risk?

Currency risk refers to the unpredictable fluctuations in the exchange rate of one currency with another. Over a more or less long period of time, it is possible for a currency to be devalued, thus directly impacting trade from one country to another. This uncertainty therefore creates an exchange rate risk for people carrying out transactions in which the exchange currency is not the same. If you carry out a transaction in which the payment is not in euros, possible fluctuations in the exchange rate can have particularly significant effects:
Transactional foreign exchange risk
when transactions carried out in a currency other than the euro involve payment terms, changes in the exchange rate may have a significant impact on the cost of the transaction.
Accounting foreign exchange risk
corresponds to the difference between the valuation of an asset denominated in a foreign currency at the time of recognition and its actual realization due to changes in exchange rates.
Risk of loss of competitiveness
The devaluation of a currency directly impacts the price of the products included in the transaction, directly affecting their value and competitiveness.
For exports and imports of products made by companies, exchange rate risks thus appear as a particularly important factor in their activity. In order to minimize these risks, it is therefore advisable to adopt a hedging strategy that is adapted and designed to anticipate currency exchange rate fluctuations as well as possible.

What is the foreign exchange position?

The foreign exchange position defines the financial situation of a company that works in several currencies. The calculation of a company’s foreign exchange positions is based on several elements: forecast cash flows, receivables, debts and assets in foreign currencies. When the amount of debts and commitments is equal to the amount of assets and receivables, then the foreign exchange position is closed. Conversely, in the event of a difference between these two amounts, it is necessary to make calculations based on the company’s situation and activity. Indeed, the value of a company’s assets will vary according to the currencies in which it exports or imports. This foreign exchange position is an important element in identifying the financial situation of a large company as well as an SME.

Why manage foreign exchange risk?

Foreign exchange risks for a company’s business are very real and should not be overlooked. In order to avoid the consequences of exchange rate fluctuations, this risk must therefore be managed as well as possible. A good management of the exchange rate risk will be beneficial for a company’s activity on several levels:
    • Improved cash flow forecasting and reduced income statement volatility
    • Decrease in financial losses caused by unfavorable changes in the value of currencies.
    • More accurate evaluation of product selling prices.
    • Guarantee of the competitiveness of the company.

Protecting yourself against exchange rate risks thus appears to be an essential element to guarantee your company’s activity and ensure your competitiveness for your international exchanges.

Managing risks: hedging foreign exchange risks

Fluctuations in the value of currencies can have a particularly significant effect on your company’s bottom line. To protect yourself against these risks, it is therefore necessary to have a strategy adapted to the risk ratio that the company sets for carrying out its transactions. In order to protect companies against exchange rate risks, several solutions exist today:
  • Natural hedging
  • Financial coverage

The natural hedging strategy consists of balancing all purchase and sale transactions in the same currency. To implement this hedging, it is generally necessary to adopt a strategy of relocating all production to the country where the market is located.

Financial hedging can be implemented with different strategies. Hedging instruments can be used through the foreign exchange market, also known as the currency market or FOREX. Several types of financial instruments exist to protect against foreign exchange risks:

Forward contracts: a firm agreement between the seller and the buyer on the price and amount of a transaction for which delivery and payment will be made at a later date.
Foreign exchange options: An option is a right whose value (premium) is paid by the buyer of the option to the seller of the option.
Foreign exchange swaps: a transaction in which two parties agree to modify the date of a flow provided for in a forward contract.
Zero-premium contracts: agreement fixing a range of exchange rates within which the company undertakes to carry out the transaction (both for the sale and the purchase).
In the face of exchange rate risks, companies therefore have several instruments at their disposal to protect themselves in the best possible way and avoid any consequent financial losses.

Read also our page on the valuation of hedging derivatives

 

Insurance for the exchange rate

In addition to implementing a currency hedging strategy, companies can also take out insurance policies against exchange rate fluctuations in the event of a tender. These contracts allow companies to be covered for 100% of the foreign exchange loss assessed in relation to the short term. Calculated on the basis of currency exchange rate fluctuations, this insurance enables companies to avoid any significant losses throughout the duration of the business operation.

Leveraging to reduce exchange rate risks

Other ways of reducing exchange rate risk include hedging. Currency risk accounting backing is verified when the notional amount (in amount or volume) of the hedging instrument is equal to that of the hedged item. The purpose of matching is therefore to avoid currency, interest rate and liquidity risks in the event of failure of the financial transaction.

Foreign exchange accounting: Gain, loss

Previously, foreign exchange gains and losses were recorded in financial income (loss). Now, the General Chart of Accounts requires companies to itemize these gains and losses by recording them in different accounts:

  • Account 656: exchange losses on trade receivables and payables
  • Account 666: exchange losses on financial receivables and debts
  • Account 756: exchange gain on trade receivables and payables
  • Account 766: exchange gain on financial receivables and debts
  • Account 766: exchange gain on financial receivables and debts

With this new measure, foreign exchange gains and losses must now be reflected in the company’s operations.

Reporting of exchange rate risks

Although no limits are currently imposed on companies to manage exchange rate risk, DeftHedge nevertheless proposes the implementation of a governance system and a mechanism designed to :

  • Frame the exchange rate risk
  • Measure the exchange rate risk
  • Monitoring the various financial risks on the exchange rate risk

This reporting of exchange rate risks is essential to avoid any significant financial losses to which companies may be exposed during their transactions in foreign currencies (Dollars, Euros, Swiss Franc, Pound Sterling, etc.).

Why choose the solution
SaaS DeftHedge for foreign exchange risk management?

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Having a precise knowledge of the influence of currency rates on your transactions is not necessarily easy. In order to best help all companies (large companies, SMEs, ETIs) to manage their finances and protect themselves from exchange rate risk, DeftHedge offers you its exchange rate risk management solution. Thanks to our web application, you can take advantage of numerous functionalities to improve the management of your business :
  • Currency Management
  • Automation of the daily management
  • Creation of hedging strategies
  • Centralization and security of data
  • Improvement of financial gains

DeftHedge is a SaaS solution that is particularly easy to use and that will become indispensable on a daily basis in order to manage your business and follow the evolution of the currency market. Thanks to the numerous information our software offers you, you will be able to orient your strategy in the best possible way and considerably reduce the losses linked to your transactions. DeftHedge is therefore a security for your finances which also helps you to obtain the best possible return on investment (ROI) for your operations. To benefit from quality support and to improve your strategy, you can contact the DeftHedge experts by chat or directly by phone.

For all your operations and transactions on the international market, our SaaS solution supports you in your decisions and allows you to monitor the impact and risks of your strategy. The DeftHedge application proves to be a quality tool to manage your business and reduce all exchange risks. In order to optimize your strategy and reduce the risks during your foreign exchange transactions, take advantage of the many features of DeftHedge.

Blog Foreign Exchange Risks