8 Common mistakes Companies Make in FX Risk Management
By Klarity FX Desk
Feb 18, 2021
1. Taking a Stance on Currency Movements
A well implemented hedging program should not solely be influenced by taking directional views. The goal is to reduce volatility and provide certainty to the business. Do you internally deliberate, and take a stance on currencies to determine revenue, or expense hedging strategies’? When a company takes a stance on a currency movement, they become extremely vulnerable to potential FX losses - Particularly if this approach is taken without some sort of protection.
2. Maintaining Status Quo
As the stakes are so high in foreign exchange, it can be perceived that it’s “less risky” to maintain a company’s historical approach, as it’s always been done that way. FX Policies tend to be implemented as the result of a significant FX loss generated by exposures that weren’t properly considered or understood.
3. Analyzing FX Results in a Timely Manner
For companies that engage in foreign exchange risk management practices, an evaluation should be done at the end of each reporting period to understand performance over the quarter. It’s important to promptly isolate factors hurting FX performance, so that the changes can be implemented as soon as possible; the caveat is that you are not constantly changing the objective of your forex policy.
4. Paying Too Much When Trading FX
Forex trading is very profitable for banks & brokers, in many instances they are being compensated well over what they should be. It’s important to understand the market dynamics, and know how to tell when you are being overcharged. To protect yourself from receiving unfair forex rates, there are some simple measures you can take. For instance, never email for a quote without having a reference point.
5. Maintaining and Reporting
In dealing with every aspect of foreign exchange, the accuracy of the information is pivotal. Do you know accurate market rates when contacting your broker for an FX transaction? Have you accurately recorded all FX activities? Any discrepancy in the accuracy of data significantly hampers the effectiveness of an FX policy.
6. Risk Management Discipline
Some allow their emotions to overhaul the forex risk management standards put in place. It’s important to obey by the rules of the forex policy, volatility is a function of time, a week worth of unfavorable volatility can turn into a month of favorable volatility.
7. Poor Forecasting
Having a thorough understanding in forecasting forex needs significantly enhances the effectiveness of a risk management program. However, an inaccurate prediction would reduce the plans effectiveness. This should not hinder you from hedging FX risk going forward. Even if your sales director cannot nail down the expected A/R to the nearest dollar, it does not mean you should do anything.
8. Foreign Partner Engagement
There are multiple factors to consider when hedging your company’s local currency revenue exposure. Are your primary exposures revenue or expense related? Do you understand the competitive landscape around the various geographical areas you do business? It’s important to properly understand your partner’s needs, exposures, and the landscape surrounding their operations; it’s equally as important to understand currency movements as it is for changing exposures. E.G. Selling product in USD globally doesn’t always allow for local purchasing power.