What is foreign exchange exposure?
Currency volatility has increased in recent years. The fluctuations in exchange rates continue to have a significant effect on the operations and profitability of small and medium-sized enterprises, large corporations, multinational companies, and individuals. The risk of experiencing those effects in your FX trading is known as foreign exchange exposure. There are different types of foreign exchange exposure that you should know about. It is also important that you familiarise yourself with various ways in which you may manage forex exposure risk.
The three types of foreign exchange exposure
The three types of foreign exchange exposure that you may face when making transactions in FX include transaction, translation, and economic exposure. The latter is also known as operating exposure.
1. Transaction exposure
Transaction exposure is the most basic type of foreign exchange exposure and is associated with business transactions in foreign currency. The exposure may arise due to the time it takes from an entitlement to receive money from a customer and the actual date of the money’s delivery. It may also arise during the time between placing a purchase order and settling the invoice.
2. Translation exposure
Translation forex exposure refers to the translation of foreign subsidiary’s financial statements, such as a balance sheet, from the local currency to the parent company’s reporting currency. This may arise because of the parent company’s reporting obligations to shareholders and regulators. Those obligations require the company to submit a consolidated set of accounts in the reporting currency for all the subsidiaries.
3. Economic or operating exposure
Economic forex exposure arises from the effect that unexpected currency fluctuations have on market value and future cash flows. Economic exposure is usually long-term and for this reason may affect your long-term strategies.
How to manage foreign exchange exposure
You may manage foreign exchange exposure with various products available from moneycorp, including:
Spot transfers are the simplest type of forex exposure risk management tool. They determine the terms of an exchange of two currencies between yourself and your FX provider. The variables they cover include:
• The currencies bought and sold
• The amount of money involved
• The date on which the transfer matures
• The exchange rate When you choose a spot transfer with moneycorp, you agree to buy currency at the present exchange rate. You may then use the currency to make FX payments.
Also known as forward exchange contracts, this foreign exchange exposure management tool is based on a buy now, pay later principle. You may use them to use the current exchange rate for a future transfer. Forward contracts may offer you greater certainty when planning, as they may protect you from unexpected shifts in the market. With a forward contract from moneycorp, you can buy currency at a pre-fixed rate at a later date. Our contracts let you lock in a rate for as long as two years.
Limit orders are one of the FX orders you may use to manage forex exposure. With a limit order, you may set a target rate. If the exchange rate meets the target, you will receive a notification to make the transfer. You may be able to get a better deal when you want a particular exchange rate with a limit order from moneycorp.
moneycorp offers FX options that can be created as customised solutions for your payment needs. These can be a great solution if you are looking to exchange large amounts of money, especially when dealing with more volatile currencies.