For many multinational businesses, the uncertainty created by fluctuating currency exchange rates makes it seem nearly impossible to prevent losses. Yet there are ways to effectively leverage currency exposure – not just to protect profits but to grow them. Several companies are already exploring the options of FX swings and capitalising on the opportunities that arise.
Understanding FX and how to limit risk
Currency exposure is certainly a major concern for international businesses. In fact, it is one of the most intimidating aspects of doing business across borders and a lack of understanding about the currency exchange is often one of the main reasons companies resist expanding into foreign markets. With some planning and an open mind, however, it is possible to minimise the risks and gain an advantage over competitors by dealing with international clients in their native currency.
To avoid the erosion of profit margins and boost revenue, businesses must first deal proactively with the most common short to mid-term (a few weeks to a year) exposure situations. These include:
- Decisions on when and how to exchange foreign currency revenue
- Impact of lead times and the length of time between setting prices and collecting payment
- Forecasting, budgeting, reporting and implementing strategies for repatriating subsidiary revenue
These situations are typically easy and affordable to manage. In the longer term, FX trends are just as important to think about but harder to predict. It is in the long term that businesses encounter the greatest risks. However, staying the course introduces a number of opportunities for companies of all sizes.
FX swings in action
Making the decision to accept and exchange foreign currency can have a major impact on a company's bottom line.
Businesses that only price products and services in their home currency could be inadvertently limiting sales. Foreign customers may be hesitant to make purchases in an unfamiliar currency or may be unwilling to exchange currency themselves in order to complete a transaction. Moreover, currency fluctuations could lead to inaccurate pricing, which results in revenue loss.
Companies that deal with foreign suppliers can risk overpaying if they leave the currency exchange to outside vendors, who may pad the exchange rate with additional fees to cover their costs.
Maintaining a foreign currency account can actually save companies money on exchange fees. Businesses that make frequent purchases with foreign entities can receive payment in foreign currency, hold the money in one of these accounts until it is needed, then use it to make a future payment to another foreign seller. This avoids the cost of paying multiple exchange fees on the same transaction.
When a company is open to internationalisation, the idea of a home currency becomes obsolete. This facilitates fluid currency exchange that can work in a company's favour. If a particular currency begins to move, it can be compared to a variety of others to find the least volatile relationship and thereby minimise potential loss. The more regional operations a business has, the greater the opportunity to assess and compare different currency swings.
Companies profiting from FX swings
A number of major corporations have been successful in hedging currency swings to the benefit of their bottom lines. These businesses share a few common characteristics: clear, well-developed risk mitigation policies, crisis management protocol, accurate assessment of currency exposure and a budget for currency hedging.
- Apple: The US-based tech giant generates roughly 65% of its total revenue from sources outside the United States, so the brand has a vested interest in managing its currency exposure. Apple has developed a comprehensive strategy to protect its profits from uncertainty, relying on currency hedges of three months to a year or more in order to minimise risk. In 2015, this approach earned the company roughly $3.5bn in hedge profits.
- General Electric: With operations in 130 countries around the world, effective currency hedging is crucial to GE's corporate strategy. The company has eliminated speculative activity, though it does hedge foreign exchange rate fluctuation risks. GE also does some business overseas in US dollars, effectively transferring FX risk to its foreign partners.
- Naspers: The Cape Town-based multinational media and e-commerce corporation gets roughly 77% of its revenue from foreign entities and denominates a significant portion of its obligations (like contracts and satellite leases) in dollars. Naspers typically negotiates 100% forward coverage for firm commitments for a year or two and hedges its net position with forward contracts. Surplus offshore funds are spread among different currencies to secure the best interest rate and reduce exchange risk.
- Dow Chemical: An active player in the currency exchange market, Dow Chemical does business in 180 countries and employs a primary risk management strategy focused on optimising the dollar value of its assets and cash flow. To do this, Dow works to minimise the adverse impacts of currency swings. The company combines assets and liabilities in the same foreign currency, hedging only the net exposure. A combination of forward contracts, cross-currency swaps and over-the-counter option contracts are used to manage the corporation's exposure.
- Airbus: The European aerospace corporation has a hedging portfolio of about $100bn and an aircraft book order that is eight times its yearly turnover. This means a wait time of about eight years between payment contracts and actual cash receipt for products. There is also the issue of mismatched revenue (in dollars) and manufacturing costs (in euros). Airbus uses forward contracts to guarantee current rates for future receivables to prevent losses.
Conclusion
Foreign exchange can seem complicated and intimidating, yet casting aside the possibility without in-depth research and careful consideration could mean leaving money on the table. Plenty of multinational corporations are already turning a profit by leveraging the power of currency exchange. All it takes is a solid strategy and some expert guidance
