Why Forex Risk Management is important for your business?

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Edugains is a niche advisory and outsourcing company in the domain of banking and foreign exchange risk management. Edugains started operations in 2011, and since then, they have been helping SME corporate across India to reduce overall finance cost and manage the currency risk on import-export transactions.

The foreign exchange is a global market for currencies that is estimated to be USD 5 Trillion per day as per the Bank of International Settlements. For a business dealing and sourcing across the world, foreign exchanges bring their risks along with it. Edugains helps small businesses with a newly launched forex booking platform.

Forex risk is the difference in the budgeted exchange rate and the actual exchange rate when a transaction is settled. For example, a chemical manufacturer imported certain Chemical worth USD 100,000 on Jan 15th and budgeted an exchange rate of 69 for USDINR. It takes about one month for him to receive goods and pay for them. By the time he pays, the exchange rate moves to 72, and he ends up paying Rs 72,00,000 as against the budgeted cost of Rs 69,00,000. Therefore because of movement in foreign exchange rates, he lost Rs 300,000. If the exchange rate had moved another way to 68, he would have gained Rs 100,000. So, because of movement in forex rate, the manufacturer carries a risk of increase or decrease in his product costing. So longer the time between a sale, shipping and payments, more likely that the manufacturer exporting goods to be hit by forex volatility.

To minimize the foreign exchange risk of loss, every business needs to have forex risk management practices in place. A lot of corporates are unable to put appropriate forex risk management policies, and they end up losing money and overshooting their budgeted costs.

One of the easier ways of eliminating forex risk is to receive payment only in your currency. But due to this, business cash flow risk may increase if your customer tries and time payments to get the advantage of exchange rate movements. Such a business may also lose customers to competitors who offer the flexibility of payments in foreign currency. "Given the currency rates of each country are very closely interrelated to global developments, it may be worthwhile for a business to invest time and resources to create prudent risk management practices in place for their forex exposures" says Amit Singhal, founder of Edugains a niche Forex risk management advisory and outsourcing company in the domain of banking and foreign exchange risk management. 

There are various Forex Risk Management Tips and Techniques, some of them are, know the currency risk appetite, how much to hedge at a time, enforcing strict stop losses, tracking overall exposure, focussing on correct currency pair correlation for hedging, matching incoming and outgoing forex transactions and hedging forex risk using forwards and options.

So, there is prudence in ensuring that you have a small business has forex risk management strategies in place to safeguard against currency fluctuations hence safeguarding margins.

About Cube Edugains Pvt Ltd.

Edugains is a niche advisory and outsourcing company in the domain of banking and foreign exchange risk management. Edugains, as a part of its advisory services, helps businesses in the areas of:

• Forward hedging
• Options hedging
• LIBOR hedging
• ECB hedging

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Manisha Luthra

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https://www.edugains.in