FX Risk as a hazard
Updated: Jan 14
For as long as humans have exchanged goods with each other, there have been measures to handle those transactions. For almost 3000 years, those measures are known to us as "money", as the first known currency dates back to 600BC. Ever since the exchanging of goods begun and monetary means to mediate those exchanges were created, foreign exchange risk has existed.
Today, the Foreign Exchange risk is all around us. It has always been there, and until Facebook's cryptocurrency Libra conquers the world – FX-risk will prevail. Currently various factors are throwing the FX-rates in unforeseeable directions, such as power tweets, the trade war between USA and China, the Brexit menace, and various central banks lowering their rates and participate in the QE race. Yet somehow, the old risk seems to be overlooked, ignored, or handled in manual or semi-manual ways. It is often treated as if it is a unfortunate collateral risk that stems from the core business of a company.
Whether considering asset managers investing in equities and bonds, or corporates dealing with importing, exporting, or producing in other parts of the world; FX risk is often neglected and not properly considered. FX-risk is often perceived as a bothersome part of the business that needs to be only rudimentally solved. As it's not part of the core business focus, it takes the role of an annoying side task when dealing with international trading.
Moreover, the software that underpins businesses seems to have it the same way. As there are many excellent portfolio management systems, they are designed to help the managers to analyze and handle their core business. They support the entire flow from back office and fund administration to the front office with risk metrics and factor breakdowns. Companies exposed to the FX risk often have invested in a system chosen from the wide variety of ERP, accounting, and sales systems, helping to manage the business. However, small- and medium-sized companies cannot afford to spend millions on a treasury system, leaving their currency risk unhandled.
Out of a variety of the solutions available, not many of them are designed to genuinely help the user to understand, provide an overview, and hedge the foreign currency risk. In a world driven by data, currency risk is often handled based on what one believes or thinks is correct. However, non-experts can not simply manage such a significant risk based on what feels right. There is a need to handle the information and decisions professionally based on hard facts and data. With the correct FX risk controlling strategy, one can make sure to gain ultimate profits without losing any revenue due to mishandled FX risk. This is where SaepioX can be necessary tool for anyone working with FX risk, but more about it will follow in the future articles.