Impact Of Currency On Profitability – How to manage the Risk

Carlos Martins, Change Financial Solutions

Where will the Rand be next year?

You pose this question to 100 people and you will probably get 100 different answers. Yet, it is a crucial topic to consider if you are an Importer or Exporter.

Currencies are the same as other goods or commodities in that their prices are influenced by supply and demand. Prices are influenced by the demand and the ability of the market to meet that demand. Many factors may influence the currency markets:

• Geo-Political Events, such as conflicts/wars, elections and government policies
• Fundamental Studies Statistics on inflation, interest rates, unemployment and economic growth] and Market Flows [commercial transaction, investments and speculative activity]. Therefore, trying to forecast or out-guess future currency movements is mostly impossible to do with any degree of certainty

Furthermore, the core business of any Company is to provide that service or sell that product for which the Company was established, as efficiently as possible. In other words:

• The Company should not be in the banking / speculative business and
• Management should be provided with the warm feeling that all financial risks (including currency risk) are under control and they will not sink the company

So, following on from the question posted above, a more appropriate question to ask is probably ‘Does my business have a costing/budgeting process and risk management policy in place for my imported components or exported products?

Risk Management Discipline

There are various approaches to managing Currency Risk but, central to all methodologies, there should be rules and processes addressing adherence to a sound Risk Management Policy, accurate Exposure Identification and Costing Disciplines.

Markets offer you products which can assist in the securing of exchange rates into the future and mitigate against unfavourable market movements. A Forward Exchange Contract is such an instrument, fixing your exchange rate for a future-dated transaction.

Hindsight may, from time to time, show that not covering was cheaper; however, a balanced and disciplined risk management approach, will, over time, provide more certainty and, more often than not, benefit your business.

Speculative or view-driven activities in managing forex risk should be avoided as much as possible, as they could result in very painful financial consequences, particularly in volatile times, such as those we’ve experienced in the recent 2 years. Nobody really knows what the future holds and, transferring risk to the marketplace, by hedging exposure to currency risk, is the way to go – this will enable you to focus on your core business.