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How to Protect your Business from Foreign Exchange Exposure?



As a business owner, you know that there are a lot of risks that come with the territory. You work hard to minimize those risks and protect your business from any potential threats. But have you ever thought about how exposed your business is to foreign exchange risk?

Just like any other commodity, currency fluctuates in value. And when you're doing business internationally, those fluctuations can have a big impact on your bottom line. That's why it's important to understand how foreign exchange exposure works and what you can do to mitigate it.

What is Foreign Exchange Exposure?


Foreign exchange exposure is the risk that your business will incur due to changes in the value of the foreign currency. This can happen if you have assets or liabilities denominated in a foreign currency, or if you conduct transactions in a foreign currency. For example, let's say you import goods from China that are priced in Chinese yuan. If the value of the yuan drops against the US dollar, that means your goods just got more expensive. Conversely, if the yuan rises in value, you just got a discount on your goods. 

Types of Foreign Exchange Exposure 


There are two types of foreign exchange exposure: transaction exposure and economic exposure. 


Transaction exposure happens when your business has contractual obligations denominated in a foreign currency. For example, if you sell goods on credit to a customer in another country, and the invoice is denominated in that country's currency, you have transaction exposure. 


Economic exposure is more long-term and happens when changes in the value of a foreign currency affect your business's competitiveness or profitability. For example, let's say your company manufactures products in the US and sells them internationally. If the US dollar weakens against other currencies, that makes your products more expensive for foreigners to buy—and less competitive against similar products made in other countries. On the other hand, if the dollar strengthens, that gives you a competitive advantage. 

How to Manage Foreign Exchange Risk?


There are a few different ways that you can manage foreign exchange risk: 


1) Use hedging instruments: Hedging instruments are financial contracts—like forward contracts or options—that allow you to lock in an exchange rate for a future transaction. That way, even if the market rate changes between now and then, you'll still get the rate that you 

locked in. 


2) Diversify your revenue streams: If all of your revenue comes from one country—or even one region—you're more exposed to foreign exchange risk than if you have revenue coming from multiple sources around the world. One way to diversify your revenue streams is to sell online through marketplaces like Amazon or eBay, which gives customers from all over the world access to your products. 


3) Invoice in local currency: If most of your customers are based in one country—say, Canada—and they're used to dealing in Canadian dollars, consider invoicing them in their local currency rather than US dollars. That way, they don't have to worry about conversion rates, and you don't have to worry about fluctuations affecting how much money you actually receive. 


4) Use a multi-currency account: A multi-currency account (MCA) allows businesses to hold and manage funds in multiple currencies all in one place. This can help streamline international transactions and make it easier to track expenses across multiple countries—all while minimizing foreign exchange risk by allowing businesses to choose when they want to convert their funds into another currency. 


Pro Tip: You can use a currency daily look-up and economic calendar to prevent such low inflation rates, in order to transfer money.

Conclusion

Foreign exchange exposure is something all businesses need to be aware of—especially if they're doing business internationally. By understanding how it works and taking steps to mitigate it, you can protect your business from any potential losses due to fluctuations in currency values.
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