Corporate FX Checklist: Effective FX Management Strategy

Advice for businesses in implementing a winning foreign exchange procedureTo optimise corporate FX management strategy, we have written the following checklist of areas to focus on. If your business follows the points indicated, we believe that you will see a more efficient business FX management procedure. We believe that this will ultimately lead to better risk management, saving time and cutting costs substantially.1. Know your FX needsAscertain your FX needs and exposure across your entire business. Clarify and take note of your import and export needs. Lastly, ensure you are knowledgeable in the fundamentals of foreign exchange, something often overlooked by many companies.2. Optimise your foreign market reachUse your FX needs analysis to assist in optimising your business reach in foreign markets. Streamlining your FX management strategy can help your business by learning how to save time and capital in FX transactions, as well as bettering your knowhow in foreign markets.3. Clarify your FX riskOnce your FX needs are established, carry out an FX risk analysis. FX rates constantly fluctuate, therefore ensure your profit margins are protected by implementing an effective hedging strategy. This begins with an analysis of your business’ risk tolerance and the capital amounts you are prepared to write off should the market turn unfavourably. Never gamble on the market moving in your favour or with capital that you cannot afford to lose.4. Pinpoint exactly what you need from your FX providerAnalyse what you would benefit from the most in an FX service provider. Is it pricing? Perhaps an efficient, online trading platform or speed of trade execution. You may value customer service above all else, or perhaps a mixture of everything. Once you have decided this, it should then guide you as you consider providers.5. Shop aroundTake your time choosing between banks, brokers and alternative FX service providers. Beware of hidden fees in the exchange rates offered. Additionally, keep your eyes peeled for high commission rates and delivery fees. With this in mind, the profitability of your company also depends on your ability to find a competitive FX provider. Full understanding is crucial to ensure you know exactly what you are being charged. It’s your money so demand transparency! Paying a large spread simply because you don’t have access to market prices is unjust.6. Compare provider pricing structureBenchmark all potential FX providers against the true mid-market rate. Many banks and brokers claim to offer the “best rates” or “unbeatable rates”. Do not take these statements at face value. Ask smart questions. Ask them to prove it by asking for the mid-market rate, and if they shirk the question, ask them what the difference is on their price. If they are not forthcoming, it is clear that they are not a fully transparent service you can trust. Crucially, you should look for the following potential charges: (1) The spread, which is the hidden fee banks and brokers add to the exchange rate; (2) trade commission fee; (3) delivery of funds fee; (4) service registration fee; (5) annual service fee; (6) and ask for any other fees that may not be mentioned up front.7. Ascertain your financial product needsBanks in particular are known for promoting complex financial products, such as an accumulator which are often not necessary for the transaction they are bought for. They do this because they are usually much more expensive than more basic products. Do you need such products, or do you just need a basic forward contract? Clarify your financial product needs and ensure you understand them fully before buying.8. Understand your currenciesEnsure that the currencies you operate with are fully understood. For instance, there is much misunderstanding regarding exotic currencies. First, try to stay away from exotics as much as possible, as they are illiquid, highly volatile and are usually only available to buy at very high fees, as their scarceness drives up the price. If you do however, have to trade with exotics, do your research on how to best protect your business when dealing with them.9. Carry out a regular review of your FX serviceIt is crucial to regularly analyse your options with your finance chief for the most effective FX management strategy, every 3 or 6 months for instance. Perhaps a better service provider has been located, that offers better pricing for your business, or a different provider offers a better selection of currencies in line with your business. Moreover, ensure that regular reviews include new analyses of your FX needs.For more information on understanding foreign exchange for businesses, check out our free guide at the following link: