According to a recent article by The Global Treasurer
, stability of the dollar is expected to be the top trend and risk for global companies in 2023
"As market volatility remains, the importance of locking in rates ahead of buying and selling goods and services is now more critical than ever. Treasurers will have learned the dangers of not hedging and it will become a necessity moving into 2023."
When a company uses and trades with multiple currencies, it may seem like a sign of strength for a lot of people. What they don’t realize is that every currency tends to fluctuate. So while today it might seem great because one of the currencies appreciated, the next day it can fall, which means the company lost some money due to that transaction.Is it risky to have foreign currency exposure?
As a company, your focus is to try and eliminate any possible risks, as much as possible. The truth is that companies take risks every day when they are exposed and work with multiple currencies. After all, the more currencies they are exposed to, the more risks there are. And it is easy to see why foreign exposure is always going to bring in problems, especially from a business standpoint.Why does this happen?
Companies that are exposed to multiple currencies are dealing with a phenomenon named the foreign exchange risk. This appears when a company maintains financial statements or even engages in a variety of financial transactions using a different currency than their national one. A company from Israel that does business in China receives their financial transactions in yuan, although the financial statements have to be reported in shekel. Because of that, they are exposed to the foreign exchange risk.
This risk appears from the appreciation or depreciation of that base currency. You don’t have any control over it, since currency prices can change pretty much every day. It’s a particularly major risk to keep in mind for importers or exporters, as well as people trading on international markets all the time.What kinds of foreign exchange risks exist?
There are 3 main types of foreign exchange risk.
Is there any way to alleviate these risks?
- Transaction risk, since the exchange rate can fluctuate before the transaction is fully completed.
- Economic risk comes from the company being exposed to the exchange rate fluctuations and not having any control.
- Translation risk which comes when you have the headquarters domestically, but you only conduct business in another country.
Yes, strategies like hedging can actually become an advantage and they can help alleviate some of the losses. However, whenever a company is exposed to multiple currencies, there will always be risks to deal with. There are also plenty of rewards, which is why many companies still engage in multi-currency trades. But whether you are a startup or an international business, you still have to understand that these issues can arise and you need to be prepared for the numerous fluctuations to come!
For a free demo to assess your company's currency risk- you can try us out here:Keese Demo