Currency management is the process by which international companies with significant cross-border transactions implement strategies to limit their exposure to foreign exchange fluctuations, in order to maximise the return on their foreign market operations.
Currency management and international businesses
The relevance of currency management to a company is proportional to the volume of business that the company carries out in currencies different from its functional currency. Businesses with a major presence in foreign markets or substantial costs in foreign currencies usually define currency management strategies, that involve all the teams at the organisation.
An efficient currency management strategy requires a solid definition of the company’s FX needs and objectives, and a sound understanding of the dynamics and the main elements affecting the foreign exchange rate. Once these aspects have been clarified, the company will have to set a hedging strategy and choose the right tools to minimise the impact of adverse FX movements on the company’s earnings.
The most common and straightforward hedging tools are FX alerts, conditional market orders and FX forwards, together with futures and options contracts. However, there is a wide variety of financial products for this purpose with an increasing degree of complexity.
Furthermore, at companies working with significant volumes of currencies, with complex payment schedules or with a business model that hinders accurate forecasting, manual currency management is inefficient and probably also dangerous. These companies can use sophisticated dynamic hedging solutions that allow them to completely automate currency risk management, thus protecting their profit margins with minimal effort.