Risk Management case study: currency exchange rate

Case Study

If your company sells goods and services abroad or receives those from other countries it is your daily business to secure punctual deliveries and payments according to contracts as well as dealing with political and economic risks.

The monitoring of potential exchange rate risks is increasingly important. In export-transactions there are often several weeks between the contract signature and the payment in foreign currency. Due to the volatility of the currency markets, the margin can be significantly diminished. In a worst case, a profitable business can even turn into a loss. By concluding forward exchange contracts you can secure a fixed exchange rate for future payments in foreign currencies which will then sustainably reduce your risk.

Situation: A German manufacturing company exported equipment worth 100,000 USD. Without hedging the currency position the company loses 5,301 EUR in a period of less than six weeks (equals to minus 6.5%) compared to the expected remuneration for their goods at contract signature.

Currency

Approach: TALA Consult supports you actively in your efforts to manage your currency risk. Through our IT solutions, you have the opportunity to continuously monitor your current FX position and the related risk. This helps you to take the necessary decisions in time and secure your margin.

If you want to hedge your FX risk with financial instruments, we assist you to identify affordable solutions tailored to your needs in the financial market. Besides classical instruments of the forward exchange market, we include new and innovative solutions in our risk management approach.

Talk to us. We are happy to work with you on a financial concept that takes into account your individual needs. Our advice is transparent and fully independent from banks.

 

FAQ

Which department is involved in a risk management project?
Traditionally, commodity price risks are managed by the purchasing departments through their procurement strategy and sometimes at an operating units level (plants, factories). In this case, it is a common way to manage exposures  primarily on usage volumes and notional amounts. But this approach leads to apply short term strategies and coverage strategies while the company needs a sustainable approach to satisfy its long term targets. This is the reason why our market risk management projects involve three key departments: Purchasing, Sales and Finance.

Which are the typical mitigation strategies available ?
There is not one unique solution to cover the risk but the different alternatives can be grouped into four levers:

  1. Margins Management: manage profitability through price changes and raw material price transfer to customers.
  2. Procurement strategies: control purchasing costs through long-term agreement and fixed prices with suppliers or anticipate purchasing volumes and store the raw material.
  3. Hedging: transfer the price risk to third parties with financial instruments (futures, swaps, option and other instruments) to manage the residual exposure.
  4. Strategic management: innovate and modify the marketing mix by developing  products with a lower ratio risk vs margin. Invest on upstream or downstream businesses (e.g. invest on corn production for a stark manufacturer).

 

TALA consult can also provide your organization with customized training and coaching regarding commodity and currencies risk management. Please contact us for further information.

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