Foreign Exchange Fundamentals: What is FX Risk and How to Protect Your Business

Even small changes in currency conversion rates can really affect your business's profits. This is due to currency volatility, which introduces foreign exchange (FX) risk to any business involved in international transactions.

In this blog, we're going to look at what causes FX risk and share some effective FX risk management strategies to keep your profits safe, even when the economy is unpredictable. Let's learn how to handle the ups and downs of currency rates and reduce FX risk for your business.
 

What is FX risk?

FX risk, also known as currency or forex risk, is a potential challenge in international trade, stemming from changes in currency exchange rates. It impacts the financial outcomes of transactions that involve different currencies.

Take, for example, a tech company in Canada that's due to pay for software development services from India in a few months. If the Indian rupee strengthens against the Canadian dollar during this period, the payment could end up being more expensive than planned, affecting the company's financial planning.

Now that we've defined FX risk, let's take a quick look at the factors that contribute to this risk and the volatility of currencies.
 

What factors cause FX risk?

The key factors causing FX risk arise from the dynamic and interconnected nature of global financial markets.

Economic policies and indicators

Changes in key economic indicators like inflation rates, interest rates, and GDP growth can influence a country's currency value. Central bank's decisions, in particular, can have a major impact on foreign exchange rates and overall volatility.

Data reports and economic releases

Regularly scheduled economic reports and data releases, such as employment figures, manufacturing data, and trade stats also play a significant role. These reports provide insights into a country's economic health and may lead to immediate adjustments in currency markets as investors reevaluate their positions based on the new information.

Market sentiment

Traders' perceptions and reactions to news and global events can cause immediate fluctuations in currency values. Market sentiment can be influenced by a variety of factors, including economic reports, political news, and natural disasters.

Differences in interest rates

The interest rate policies of central banks have a significant impact on currency values. Currencies from countries with higher interest rates often offer higher returns on investments, attracting more foreign capital and causing the currency to appreciate.

Political stability and current events

Political events, such as elections, policy changes, or geopolitical tensions, can lead to uncertainty and volatility in currency markets. Investors tend to favor stable and predictable environments, so political instability can weaken a currency.

How MTFX can help you protect your business from FX risk

Reducing FX risk is crucial for businesses engaged in international transactions. MTFX offers several tools and services designed to protect against the adverse effects of currency fluctuations:

Forward contracts

These allow you to lock in an exchange rate for a future transaction, providing certainty about the cost of your international payments or receipts, regardless of market volatility. By securing a rate in advance, you can budget and plan with confidence, knowing your exchange rate will remain fixed.

Limit orders

Market or limit order enables you to specify a target exchange rate for your transactions. MTFX monitors the market for you, executing the trade when your desired rate is reached. This ensures you capitalize on favorable market movements without needing to constantly watch the markets.

Rate alerts

Stay informed with automated rate alerts that notify you when your target exchange rates are achieved. This tool helps you make timely, informed decisions, allowing you to take advantage of optimal currency conversion rates as they occur.

Currency outlook and updates

MTFX provides regular currency updates and analyses on currency market trends, offering insights into factors that could impact exchange rates. This information helps you understand the market dynamics and make more informed decisions regarding your currency exposure.

Personalized guidance

Perhaps most importantly, MTFX offers tailored advice from currency experts who understand your specific business needs and risk tolerance. This personalized approach ensures that the strategies implemented are aligned with your business objectives, providing not just transactional support but strategic value in managing your FX risk.
 

Protect your profitability with MTFX

Managing FX risk is essential for any business involved in international trade. By understanding the causes of currency volatility and employing strategic tools like forward contracts, limit orders, rate alerts, and gaining insights from currency outlooks, you can shield your profits from the unpredictable nature of foreign exchange markets. With personalized guidance from experts at MTFX, managing the complexities of FX risk becomes a manageable task, allowing your business to thrive in the global marketplace.

Sign up for a business account today and start protecting your bottom line from foreign exchange risk.