In an ever increasingly globalized world, exposure to foreign currency risk is something that needs to be kept in a firm's radar at all times.
In this podcast, we have with us Russell Raihan, CFO of Knauf, an organisation which has operations in Europe, the USA, South America, Russia, Asia, Africa, and Australia.
Operating in over 85 countries means that Knauf has a number of currency rates which need to be monitored and managed continuously.
Russell shares with us what finance professionals need to keep in mind when managing both transaction and translation risk, and suggests the optimal ways to predict the foreign currency requirements of an organization.
He also shares with us his views about the future of the accounting function and the need for accountants to move away from traditional debit and credit.
When there are significant events which have a huge impact on the exchange rate, any business operating in more than one country is exposed to both transaction risk (the risk that the exchange rate may move adverse to its interests) and translation risk (the risk that adverse movements in the rate may result in negative impacts on the organisation's financial statements).
It is a common fallacy to consider only the downside risk of forex. Any business which has the risk appetite necessary can engage in transactions with no hedging arrangements to take advantage of any gains that may arise from favourable movements in the exchange rate.
There are many firms which do not hedge their risk because they believe that somehow the rate is going to move favourably. They view the volatility in the currency markets as an opportunity instead of a risk, and this view is not entirely incorrect.
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Chris Towner, who heads and heads the European foreign currency risk management team at Chatham Financial, suggests a seven step approach to setting a foreign currency policy for your firm, in the FM Magazine article.
The first step is to set out a strategy. He feels that the best time to do this would be in a neutral market. The next step is to identify the overall exposure to risk. Further, quantifying the risk will help in determining the strategy. Next, the objectives need to be accessed and the responsibility for these objectives are to be assigned to someone. He feels that resting the responsibility on the CFO’s shoulders alone will not be best practice. This strategy which is created needs to be communicated to the whole organization so that they can adjust the credit and settlement terms to suit this strategy. The final step is to continuously monitor both the policy and the environment and fine tune the policy accordingly.
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