A Guide to Minimizing Foreign Exchange Risk

September 7, 2020
Personal
Business
From
To

A significant number of individuals and businesses now make international money transfers for an assortment of reasons. For instance, while a parent might need to pay a child’s international tuition fees, a small business owner might need to pay an overseas supplier. No matter what the scenario, sending money overseas exposes you to foreign exchange risks. Fortunately, there are measures you may take to minimize the impact.
 

What foreign exchange risks do you face?

Foreign exchange risks that you might face when dealing with exchange of currencies come in different forms.

  • Translation risk. Businesses with international dealings translate their international assets and liabilities as well as financial statements from foreign currencies to local currencies. This translation exposes them to foreign exchange risk, given that exchange rates remain prone to ongoing fluctuations.
  • Transaction risk. Fluctuations in exchange rates from the payment date to the settlement date expose you to transaction risk because of exchange rate fluctuations.
  • Economic risk. Any unexpected fluctuations in exchange rates expose you to economic risk. If you have invested in international projects, contingency risk enters the picture too.

 

How to minimize foreign exchange risk?

Whether you wish to send money overseas as an individual or a business, you get to choose from different hedging alternatives to make the most of exchange rate fluctuations. However, not all banks and overseas money transfer companies provide the same alternatives.
 

Forward contracts

With a forward contract, you enter into a legal agreement to carry out an overseas money transfer at some point in the future by fixing an exchange rate in advance. This eliminates the risk of any negative fluctuation in exchange rates, and you do not have to worry about the prevailing exchange rate when the transfer is to take place. Some money transfer companies let you lock in exchange rates for up to two years.
 

Limit and stop loss orders

With a limit order, you get to set an exchange rate that is better than the existing rate, and once the market reaches the desired level, your transfer goes through automatically. With a stop loss order, you get to set the minimum exchange rate at which you are willing to carry out your transfer. Both orders may run together, giving you the ability to target a better than prevailing rate while also protecting you against any significant drop.
 

Money market hedge

Businesses may choose to go this way, although this route requires carrying out transactions based on prevailing rates. In this scenario, you may buy or borrow foreign currency and hold it until the time you wish to carry out the trade. The money you hold in the foreign currency, in the meanwhile, earns interest.
 

Forex swaps

This is another option presented to businesses. In a typical forex swap, two parties enter into an agreement to exchange two different currencies in equivalent amounts for a given time period, and then reverse the exchange later. These swaps take place at predetermined exchange rates.
 

Multi-currency accounts

Using a multi-currency account gives you the ability to hold funds and transact in different currencies. When you make payments from or receive payments in accounts denominated in matching currencies, you do not have to worry about exchange rates because no exchange of currencies takes place. Currency exchange takes place when you add funds into your multi-currency account or make withdrawals into your local bank account, and you get to decide when to do this.
 

Money Transfer Companies That Provide Hedging Tools

Here are some of the leading overseas money transfer companies that provide hedging tools. Read more detailed reviews for of the best money transfer companies for risk management.

 

Money Transfer Companies That Provide Multi-currency Accounts

Some of the top overseas money transfer companies that provide multi-currency accounts include:

While you cannot avoid risks associated with foreign currency exchange completely, following a few simple measures can help minimize your exposure to the volatility the market tends to experience. However, since individual requirements tend to vary, compare your alternatives only after addressing your own needs first.