Currency Risk Management: an alternative income stream for business?

Currency Risk Management, real Currency Risk Management, has the reputation of being a complex part of any business.  Like most business challenges significant opportunities exist from complexity.  In this instance it is the ability to generate an additional income stream.

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Currency Risk Management and Diversification

Every business owner is exposed to some type of risk in their everyday life – whether it’s from driving, walking down the street, selecting stock lines or something else. A business owner’s personality, lifestyle, age and business experience are among the key factors to consider for individual risk purposes. Consequently, each business owner has a unique risk profile that determines their willingness and ability to withstand currency fluctuations. In general, as perceived financial risks rise, greater returns are expected to compensate for taking those risks.

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Currency Risk Management for Competitive Advantage

There are many ways to manage currency exposures.  Some give you long term fixed rate outcomes so that your business has complete certainty as to the exchange rate.  Other approaches simply take the prevailing rate of the day with the hope that if the market moves adversely, this can be either absorbed into profit margins or passed on to consumers.

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Measuring Your Currency Risk Management Portfolio

When you commence a risk management portfolio, it’s important to remember that you are making decisions for both the short and medium term.  In most instances, the objective is to attain certainty regarding your currency requirements as well as the attainment of a particular exchange rate level on an annual basis.

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How Important is Collaboration with Your Financial Advisor?

Much has been written about the role of a Financial Advisor. ASIC have suggested that:

Consumers who seek financial advice expect their advisor will act in their best interests and that the advice provided will leave them in a better position. (RG 175.244)

When assessing whether an advice provider has complied with the best interest duty [consideration will be given to] whether a reasonable advice provider would believe that the client is likely to be in a better position if the client follows the advice. RG 175.245)

But what does this mean in practice?

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What is Tailored Financial Advice?

Tailored financial advice is to the financial services industry what Haute Couture is to women’s fashion and a bespoke suit is to men’s fashion.

To illustrate, let’s consider a suit. A suit can be bought for a man or a woman. It can be bought off the rack from a department store or it can be made to your own exacting specifications and body shape.

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The Business of Currency Risk Management – Focusing on Risk and Return

While there is nothing wrong with only focusing on protecting against currency losses. In the current highly competitive environment, there are those who are only focusing on maximizing profits. These are the companies that typically hedge everything with a set and forget strategy when the market is moving against them, or don’t hedge at all when the market is moving in their favour.

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The Business of Currency Risk Management

Unlike most financial markets, currency markets move in relative terms.  They are impacted by the economic and political conditions and policies of one country compared to another as well as the observations of traders and commentators as to the successful (or not) implementation of these economic and political policies when one country is compared with another.

How then, do we take this information and use it to achieve the best possible result as it applies to the management of currency exposures?

In this paper we will discuss:

  1. How to define currency risk management;
  2. The application of Benjamin Graham’s investment approach to currency risk management; and
  3. Why it pays to take a disciplined approach to currency risk management
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Herd Mentality

As experts examine the factors that led to the world’s financial crisis, research offers intriguing insight into the role human behaviour and hormones may have played.

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The Folly of Forecasting

The beginning of the year heralds the time for predictions.  It seems everyone has a view as to the direction of financial markets – equity, debt and FX – and each forecaster can give you a plausible explanation as to why you should believe them.  But financial markets predictions have about as much chance of success as a 4 year old playing pin the tail on the donkey: if you get it right, you have been very lucky.

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