Managing risk

 

Some time ago I hosted an event for the Oxfordshire International Business Club where we were talking about doing business – or trying to do business – in China and Asia.

It is a massive subject, with a tremendous opportunity matched by high levels of risk. Not something to consider for anyone whose resources are already stretched!

One topic that almost always comes up is how do we manage the money – how do I get paid for the goods I have sold, or how do I pay for the goods that are being shipped.

There are quite a few ways of managing those risks, using the banking system so that you are not releasing payment for the goods until you have inspected them, or if you are selling only doing so against a letter of credit – a promise to pay – where you will get the money if you meet the conditions in the LC.

Often overlooked in the planning stage is the currency risk.

Currencies move against each other all the time, and a RMB today is not worth in GBP what it was yesterday – or even last second. It could be worth more, or less.

The usual way of managing that risk is to use a derivative (before you panic about banking crises they are not all bad) to fix the exchange rate. You know that in 3 months you will have to pay 10,000 of a particular currency, so you can go to your bank and buy the 10,000 now so that you’ve secured the funds at today’s exchange rate. It is a little more complicated – you don’t actually buy the 10,000, you buy a derivative – the right to buy the 10,000 at today’s rate in 3 months time. You will pay for the derivative but you have reduced your currency exposure.

A different way of managing exchange risk is to reduce it.

I was responsible for a business that had part of its revenues in EUR. We operated in GBP so that we had an exchange risk on the Euro sales. Before my time, we’d agreed some supply arrangements with another business in the Eurozone, and eliminated the exchange risk to us by agreeing a price in GBP. Changing that agreement so that we bought in EUR rather than GDP reduced our overall risk – and we were able to reduce the price per unit from the supplier as we were taking on his currency risk.

If you are trading in more than one currency, don’t just hedge everything. Look for opportunities to balance your supply side and sales side currency exposure.

I call that Natural Hedging

 

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