Exchange rates today fluctuate faster than ever, increasing the risk and the potential for loss for companies the large multinational firm to the small importer/exporter.
It is not unusual for major currencies to move 20 percent in either direction in a year. And everything from unemployment rates to rumors that the Federal Reserve will raise interest rates affects volatility, which in turn affects currency rates.
Due to the complexity of currency fluctuations and volatility, many smaller companies have, in the past, conducted transactions in U.S. dollars, seemingly passing all risk onto suppliers. However, it also limited opportunities and prevented companies from taking advantage of possible exchange rate gains.
Opening yourself up to a currency's volatility can work both against and in favor of your bottom line. If your business does 25 percent or more of its revenue overseas during any single year, taking a loss due to currency fluctuations -- or missing out on a possible gain -- can have a significant impact on your company.
Business leaders should consider all of their exposure when buying or selling in the global marketplace. Hedging is one way to greatly reduce or eliminate the uncertainties attached to foreign currency transactions. Through products such as forward contracts, a company locks in a currency conversion rate that will be available at a specified future date, mitigating the chance that profit will disappear or that costs will go up if the foreign currency value moves unexpectedly.
Technology integration and customization
As the market has become more volatile, technology has made foreign exchange products more accessible for businesses that don't have departments dedicated to analyzing foreign markets.
Often, the head of a smaller company does it all, making it difficult for him or her to deal with time-consuming currency issues while keeping a tight rein on the company's day-to-day operations.
It can be difficult to keep up with foreign markets, and some companies employ a third party to help them evaluate and understand their financial objectives and risk tolerance, and create sound long-term strategies that meet both needs.
Technology -- specifically, the Internet -- made these products more accessible and easier to integrate and customize based on a business' specific needs. With the technology products available, smaller companies can train centralized staff to use Web-based products to mitigate currency fluctuation risk.
Finding an international partner
To effectively hedge risk with foreign currency transactions, companies need to work with international banks or institutions that have a major presence in the financial sectors of the countries where the business transactions take place.
But any company can say it is international. The question is, what does international actually mean? Unless the bank or organization is a market maker -- an organization that trades in foreign currency and the foreign markets -- it needs a third party to set currency prices.
So do your homework before taking at it face value when U.S. banks say they're international banks. It may turn out that they're really relying on a network of foreign correspondent banks, which may or may not be efficient or cost-effective.
The bottom line is that it's imperative to tap into expertise that can help your company move forward. Roy D. Hasbrook (firstname.lastname@example.org) is senior vice president/division manager of LaSalle Bank's Northern Ohio Lending Division in Cleveland. His office is responsible for developing new banking relationships with mid-to large-cap companies throughout Ohio. LaSalle is uniquely positioned to help its customers succeed in the international marketplace. As a subsidiary of ABN AMRO Bank, it offers an advantage that few banks can match including local support in more than 3,400 locations in more than 60 countries and territories. Reach Hasbrook at (216) 802-2200.