Selling Internationally? Here’s How to Minimize Your Currency Exposure Risk
Global sellers face a multitude of challenges all the time. One of those challenges is the FX risk, also called currency risk. It’s a risk that everyone who needs to deal with multiple currencies is exposed to. Foreign currency exchange (FX or forex) rates are changing all the time. At the moment, they are extremely volatile because of the current pandemic. This situation isn’t likely to change soon due to the global economic recession. Therefore, any business that sells internationally must look for ways to minimize FX risk. This means you need to learn how to hedge it.
What the Coronavirus Pandemic Is Doing to FX Volatility
The COVID-19 pandemic is devastating economies and the FX market reflects this. This crisis has triggered an unprecedented outflow of capital from developing markets. The USD is appreciating rapidly there because of its status as the world’s reserve currency. This is crushing developing economies further, increasing economic instability on a global scale.
At the moment, the USD appreciation against top currencies from developed countries has been halted somewhat. However, this will not last, so the volatility will spike there as well. The entire situation is highly precarious because the US economy is in a bad place right now.
Usually, the USD is stable and growing in value during a global economic recession. However, the pandemic has hit the US extremely hard. America is still suffering from the second wave of the virus. Lockdowns continue in some areas. Therefore, the economy cannot restart and begin to recuperate. Instead, the number of bankruptcy applications as well as unemployment benefits claims are at an all-time high.
This economic situation weakens the USD. For now, it’s only the fact that this is the world’s reserve currency that’s stopping the Dollar from plummeting. However, if the US economy gets worse, this might not be enough. In that case, the FX rates volatility will become exponentially worse.
The conclusion any international seller should make from observing the current economic situation is that volatility will continue. Therefore, your currency risks are extremely high now. This means you need to look into business FX hedging options. Those are quite a few, but if you try using banks for this purpose, you won’t get access to many. In fact, banks are very picky about the customers they help to hedge. And doing this completely on your own is a huge risk in itself.
Luckily for all sellers, today there are services that can help you manage and hedge foreign currencies with ease.
How to Start Hedging Your Currency Risk
FX companies that are also known as online money transfer companies are your solution for currency hedging. These companies specialize in international currency transfers. However, they also offer a wide range of currency services, including hedging. Moreover, they also offer guidance that will help you understand when and how to hedge to achieve the best results for your business. This means that the company can help you decide which FX hedging tool to use and when.
Also, you should know that forex companies of this type offer much cheaper money transfers compared to banks. Paying your suppliers or accepting payments from customers abroad can be expensive. Transfer fees and bad FX rates used by banks and the majority of common transfer services (Western Union, MoneyGram, PayPal, etc.) make every transaction cost anywhere from 3% to 10%.
However, with FX companies, these costs can be reduced to under 1%. These services definitely are a wise choice for big business transfers as the cost of transfer usually increases with the transfer volume when going through a bank.
Best FX Hedging Options a Global Seller Can Use Now
Forward contracts are a very popular method of hedging with FX companies. Simply put, this contract allows you to purchase an obligation to buy or sell currency at a certain FX rate on a specified day in the future. Usually, the contracts last for 12 months.
You will pay a fraction of the contract’s value right away. This will be about 10%. Note that the FX rate used in the currency forward contract has nothing to do with FX rates forecasts. Therefore, you cannot use them as your measurement for whether entering a forward contract now is a good idea. Also, during periods of volatility, no one can make forecasts with any measure of accuracy. Therefore, relying on them might be a huge mistake.
There is also the risk of using forward contracts. This specific hedging tool means you are obligated to honor the contract on the completion date. Therefore, if the spot rate changes in your favor during this time, you will lose money instead of saving it.
Therefore, while using a forward contract does help with planning your business’ budget, it doesn’t necessarily help you save money.
FX options, also called currency options, are similar to forward contracts. However, they allow you to overcome the biggest risk those have. Unlike forward contracts, FX options give you the right to purchase or sell currency at a certain rate in the future. Note the difference between “right” and “obligation”.
To put it simply, FX options allow you to make a spot trade if the FX rate on the contract’s completion day is better. This means that you both get some security against the forex market volatility and a chance to save some money.
However, you will pay a premium for this right. Therefore, the end difference might not be significant at all.
FX options are the most commonly used hedging tool for businesses. They are very easy to get with FX companies, regardless of how big your company is. You can also use them for currency speculations. But in that case, you will need to get advice from a very experienced FX trader.
A market order is not as much a hedging tool as a solution you can use to exchange your currency at a specific time when the rate is most favorable. Essentially, you place an order for an exchange to be executed when the market reaches a specified position.
FX companies will perform the exchange automatically, so you don’t have to monitor shifts in forex rates. However, note that the exchange will go through at a specified rate only. Therefore, if it changes to an even better position, you would have missed your chance.
This service might not be necessary for you at all if you use the services of FX companies. Those can send you alerts when FX rates reach specific levels. Therefore, you will be able to decide whether you want to make the exchange or wait for a little while.
However, you can use a spot-loss order to avoid big losses. In this case, the market order is fixed at a low rate and the exchange will trigger if the market falls to that point. This is done to reduce your losses.
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In Conclusion: Hedging Is a Necessity in a Volatile FX Market
Experts agree that FX volatility is high and this issue will persist for a while. Therefore, hedging is the only way to protect your international selling business as much as possible. FX companies allow any of their customers to hedge and even offer guidance on how to do it right. Therefore, any seller that wants to get through this difficult period with minimal losses, should consider using these services. This is more important now when online selling is increasing in volume despite the global economic crisis.