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How Does Forecasting Minimize FX Risk?

August 29, 2013 − by Keith − in Blog − Comments Off on How Does Forecasting Minimize FX Risk?

How Does Forecasting Minimize FX Risk?

Foreign exchange transactions can be helpful for managing a company’s foreign currency liquidity. In order to minimize FX risk, foreign currency cash flow forecasting can help to predict future cash requirements for a company. Foreign currency cash flow forecasting can also lead to better decision making when it comes to hedging foreign exchange exposures.

FX risks to a company selling goods overseas can be immense, especially when dealing with countries that are not financially stable or are politically volatile. When forecasting future receivables, your cash flow forecasting will take into account the anticipated earnings from international sales, giving you a picture of what you expect to receive. However, the longer the anticipated payment date is, the more FX exposure you have, creating a risk for lower-than-expected income. Cash flow forecasting can help you to anticipate this risk and take actions to hedge, or offset, the possibility of loss through FX exposure.

Forecasting can help you make decisions about how to hedge your foreign exchange exposures. Specifically, you may want to consider contracts through the futures or forwards markets that will come due on a specific date, hedging against the expected FX exposure in the future.

Forecasting will help you see when to hedge FX exposure and just how much risk you may need to hedge against.

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