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The global foreign exchange (forex) market is massive with an average daily trading volume of about $5.3 trillion. However, currencies are heavily correlated to socio-economic and geopolitical events; hence, the forex market often experiences volatile crests and troughs based upon newsworthy events.
For businesses with international exposure, currency risks are a regular part of doing business. Chief financial officers are often tasked with the responsibility of managing such risks. For instance, if your business is US-based and you buy raw materials from Europe, your cost of buying raw materials will change as the USD fluctuates against the euro. If you are a European company with a loan from a Chinese bank, you’ll most likely earn revenue in euro, but you’ll need to service your debt in yen.
Businesses with international exposure are usually subject to transactional risk in relation to cash flow, translation risk in relation to assets and liabilities, and economic risk in relation to market competition from international rivals.
As we all know, however, innovation is constant, and cryptocurrencies (which are typically traded on crypto exchanges as opposed to currency exchanges) may have the potential to eliminate FX risks for businesses by unifying the measure and transfer of value in international trade.
Traditional FX Management Approach
Businesses with international exposure often utilize a broad spectrum of traditional corporate FX solutions, services, and products to minimize their risks. For instance, forward contracts give a company the right to purchase or sell a specific currency at a predefined exchange rate on a future date. Forward contracts are typically hedging tools that do not require the company to make an upfront payment while locking down a deliverable or cash-settled exchange rate.