International/global trade is essential to the UK economy. It has been reported in 2022 that global trade accounts for as much as 69% of its GDP.
And it’s not hard to see why. The UK is the world’s sixth largest importer, and 15th largest exporter of goods. It is also the second largest exporter and largest importer of commercial services.
Trade has a positive impact on the economy. Exports create new business opportunities and additional sources of income. Exports can also help businesses to expand production and to use their resources more efficiently. International trade increases competition, which leads to higher productivity and investment.
Trade can also have a positive effect on the economy in other ways; raising living standard, providing consumers with lower prices and more choice, supporting economic growth, and helping long-term economic development.
BUT – with the exponential growth of global trade brings with it an increased risk. Foreign exchange risk causes finance directors and CFOs stress, with the possibility that the company will lose money on international trade because of currency fluctuations.
Foreign exchange, also known as currency risk, FX risk and exchange rate risk, describes the possibility that an investment’s value may decrease due to changes in the relative value of the involved currencies. It affects investors – and any business involved in international trade.
When does this risk occur?
When a contract between two parties specifies exact prices for goods and services as well as the delivery dates. So, if a currency’s value fluctuates between the date the contract is signed and the delivery date, a loss could occur for one of the parties.
And this happens because the prices of imported goods will change in value, including many domestic products that rely on imported parts and raw materials, Exchange rates can also impact investment performance, interest rates, and inflation – which can even influence the job market and real estate sector.
SO how can you reduce FX Risk?
Finance teams employ a specialist to put a risk management strategy in place. This minimises potential losses that could result from fluctuations in exchange rates. It involves assessing the type and level of risk, measuring it, then deciding on the appropriate methods to manage that level of risk.
Want to learn more? A speaker at our first autumn financeSHOWCASE, John Freme from XE will be holding a seminar: ‘Navigating the Most Liquid and Volatile Market in the world’.
Get your free tickets to our financeSHOWCASE, held at Tottenham Hotspur Stadium, 17 September, here
