Foreign exchange (FX) rates today fluctuate quickly, increasing the risk and the potential for loss for companies from large multinational firms to small importers/exporters.
It is not unusual for major currencies to move 20 percent in any one year. And everything from unemployment rates to rumors that the Federal Reserve will raise interest rates can create volatility, which affects currency rates.
Due to the complexity of currency fluctuations and volatility, many smaller companies have, in the past, conducted cross-border transactions in U.S. dollars, seemingly passing all currency risk onto their suppliers. This tactic, however, limits opportunities and prevents companies from taking advantage of possible exchange rate gains. In addition, many suppliers will "gross-up" prices to help provide an embedded cushion in their FX risk management practices.
Opening your company 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 business overseas in any one year, taking a loss due to currency fluctuations -- or missing out on a possible gain -- can have a significant impact on your company's income statement.
Business leaders should consider their total 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 for availability 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. As such, some companies turn to third parties 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 -- has made these tools more accessible and easier to integrate and customize based on a business' specific needs. With the expanded availability of these tools, smaller companies can train centralized staff to use Web-based products to mitigate currency fluctuation risk.
Finding an international partner
To effectively hedge risk related to 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.
While any company can say it is international, what does that actually mean? Unless the bank or organization is a market maker -- an organization that trades in foreign currencies and the foreign markets -- it needs a third party to set currency prices.
So do your homework before taking it at 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 not be efficient or cost-effective.
The bottom line is that it's imperative to tap into true global expertise that can help your company manage foreign currency risk and move forward. JEFFERSON M. GREEN (email@example.com) is senior vice president/division manager of LaSalle Bank's Pennsylvania Lending Division in Pittsburgh. His office is responsible for developing new banking relationships with mid-to large-cap companies throughout the mid-Atlantic region. 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 Green at (412) 255-5460.