Insight

Risk Strategy and How it Works

International business owners face unique risks when they send or receive global payments. One is the risk of currency loss during business transactions. That’s because the foreign exchange (FX) market is inherently volatile, leading to fluctuations in currency prices. While these fluctuations can translate to gains, they can also lead to losses if you need to exchange currency at unfavorable rates.

Businesses can navigate this with a defined strategy to manage the risk of currency loss when sending or receiving global payments. Certain calculated actions reduce currency exchange losses, lower or eliminate fees, and free up capital.

How Much Risk Do You Need, or Want?

FX volatility can cause currency prices to change over a short period of time, leading to a higher risk of currency loss. Volatility in the markets can increase due to a number of factors, including changing interest rates, economic news, world or local news or events, politics, or the effects of the global pandemic. 

While there’s a certain amount of risk that comes from these uncontrollable external factors, there are other factors that you can control. Your global payment and FX strategy should take these factors into account:

Risk Tolerance – Risk tolerance refers to how comfortable your organization is with uncertainty. Your company’s level of risk tolerance influences how much risk you’re willing to take on transactions, and what actions you’ll take to protect against the risk of currency loss. 

Though this seems straightforward, perceived risk tolerance is affected by emotions. Risk tolerance may actually be higher or lower than you realize. For instance, you may think your organization has a high-risk tolerance until faced with a significant loss. That loss can then create fear, causing far more conservative decisions in the future. 

Risk Capacity – Represents how much risk you can afford. Risk capacity is different from risk tolerance, but capacity can have a direct effect on tolerance. Your risk capacity is influenced by businesses’ financial commitments. The more commitments generally mean, the lower your capacity for taking on risk. 

Business Objectives – How you approach risk management depends on your business’s objectives.  These actions will depend on whether you want to preserve capital, obtain the best exchange rate when you send or receive international payments, or make additional income through currency trades. 

How a Risk Strategy Works for Your Business

You’ll always be subject to currency exchange risk when operating an international business. However, there are several strategies to hedge against risk and protect your profits and capital. After assessing your risk tolerance and capacity, and confirming business objectives, the following strategies will help manage global payments and foreign currencies:

  • Multi-Currency Accounts – these alternatives to international bank accounts let you hold funds in many different currencies. Use these currencies to send and receive payments without converting them, which saves time and money, and protects against unfavorable rates.
  • Forward Contracts – let you lock in today’s exchange rate for a future payment. You only need a small deposit today, so they also free up cash flow.
  • Market Orders – execute FX trades automatically when the market hits your specified exchange rate, no matter what time of the day or night. 

Choosing the Right Risk Strategies

Whether your business sends or receives overseas payments, or you’re trading in the FX market, you must keep track of a lot of moving parts. That’s in addition to actually running your business. Staying on top of it all is a challenge. Emotions can influence decisions, leading to actions that don’t align with your business goals, or that ignore your plan altogether. 

Expert help can guide you to create and execute the best risk strategy for your business. Working with a third party who is trained in global payments and FX trading, like TEMPUS, will help you accurately assess your risk tolerance and set goals. The FX strategists at TEMPUS are ready to advise you and help you make the right decisions to achieve your business goals. 

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