Common blunders in Forex risk Management

Common blunders in Forex risk Management

By Dr. Akansha Jain

The issue is how to best manage foreign exchange and be in win win situation. This is common problem faced by multinationals for years. Rapidly changing business models make life especially difficult for those who are tasked with managing a company’s foreign exchange risk, and many pitfalls await those who are ill-prepared. Developing proper position often suffers from common and costly problems like

1.       Sticking to same practices

                MNCs have generally rigidity about their current practices and have fear of change. Because the stakes can be so high, the perceived “safety” of maintaining any current approach can cause disaster. The problem with maintaining status quo is that the environment is not constant and assumptions that may have been true many years ago are no longer true today. FX policies needs to be implemented or updated over time in response to huge FX losses generated by exposures that weren’t previously considered or well understood.

2.      Following the direction of currency movements

               A successful hedging program shouldn't be influenced at all by directional views, or by the most recent trends that have occurred. The success of a hedging program needs to take both the underlying exposure and the hedge into consideration when determining its effectiveness.

3.      Having limited knowledge about the competitive environment and business dynamics of  various geographies where you have business partners.

    

                    Proper and sound knowledge is must about the geographies of the business partners to be able to survive the adverse position. A company needs multiple strategies for differing product lines or businesses. A good way to test if a hedging strategy is good enough is to pass it to a  “stress test” it with different “What if?” scenarios, which should include some modeling on how you and your competition, suppliers, and/or partners would react. If you can’t live with the results of a significant currency shock in either direction, chances are your hedging strategy needs some adjusting.

4.       Having an dislike to locking in losses

                   This problem often occurs with balance sheet hedging. If the currency moves out of your favor compared to    the accounting rate, the adjustment hedge will lock in a loss. One cannot wait and rest on hopes , it needs to hedge to always be in perfect situation.

5.      Creating unnecessary volatility from liquidity management

                      Forecasting and hedging the balance sheet in an optimal manner can help avoid unnecessary volatility from spot or forward trading during the month, when managing a company’s liquidity needs. Whether this activity occurs on a company’s “netting day” or any other time during the month, using even swaps to manage liquidity needs avoids unnecessary spot rate versus accounting rate impact, and eliminates the need to guess on collections or payables timing.