Analysis

Your company is unique. In the normal course of your business, you carry out a series of recurring operations which amount to what is known as your “operating cycle”. It is throughout this cycle that operational risks appear, one of which is the currency risk.

The nature of your foreign activities

The foreign exchange risk is a concern for exporters who invoice their customers in foreign currencies as well as for importers who must pay their suppliers in foreign currencies. For some businesses, foreign cash flows are consistent throughout the year whereas for others, they are seasonal or related to a limited number of projects. In some cases, the operating cycle is completed within a few weeks whereas it can, in other cases, extend over more than one year.

The notion of operating cycle is a reality for all businesses. However, the analysis is somehow different whether you are an importer or an exporter.

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Why call upon external expertise?

The foreign exchange risk manifests itself in various forms and its management requires a specific expertise.

We provide expertise to businesses, even those with several years of experience in foreign trades. We help you identify, understand, measure and manage the exchange rate risks. We have a solid experience in risk analysis, foreign exchange market, hedging instruments and banking practices.

What percentage of the risks should be covered?

It all depends of the financial consequences of exchange rate fluctuations on the profitability of your operations. These consequences vary from a company to another and it is therefore essential to quantify risk in terms of your operations. Once this information is available, it becomes possible to establish the hedge ratio that corresponds to your profit targets and your risk tolerance.

The banking services

Optionsdevises is neither a bank nor a currency broker. We do not carry out currency transactions, we do not sell any product and we are not related to any financial institution. However, we have a solid experience of the banking industry and we can help you get the most, at a fair price, out of the FX services available from your banker.

Forecasting the currency market

The exchange risk can only be efficiently managed through an action plan established to take into account the uniqueness of your business. The market forecasts provided by economists and currency analysts are not very useful. When these forecasts are inaccurate, you pay the price at the expense of the efforts you deploy to run a profitable import/export business.

Forecasting accurately the direction of the rate of exchange on a regular basis is impossible, even for experts. Relying on such forecasts to manage the profitability of your business is precarious. Many companies which tried to “beat the market” learned this reality the hard way.

Financial risk vs business risk

The foreign exchange risk exists as soon as the currency selected for the settlement of a transaction is not the base currency, i.e. the currency in which you report your financial results.

The financial risk (risk affecting the profitability of specific transactions) intervenes by weakening the value of your foreign cash flows. The exchange risk also intervenes in terms of a business risk (risk affecting your degree of competitiveness on foreign markets) whereas your products and services may become more expensive abroad due to the appreciation of your currency when compared to those of your foreign competitors.