Foreign exchange risks: How SMEs can protect themselves

International trade exposes companies to the volatility of the foreign exchange market, both when importing and exporting. Various types of tailor-made coverage exist.

All SMEs active in international trade may face foreign exchange risks. Depending on currency rates, particularly when unexpected changes occur, debts or financial assets can move in a direction which will be unfavorable to one of the parties. The same applies to sale and purchase prices in Swiss francs when they have, initially, been expressed in a foreign currency. In this area, several scenarios are possible. Some SMEs only export; others only import. Some do both. The terms of commercial transactions can also be quite varied (price fixing, deadlines and terms of payment, etc.). There are major differences depending on the countries and currencies with which the parties work, volatility not affecting all of them in the same way.

The scenarios differ so much, it is difficult to generalize problems associated with exchange rates. Consequently, in the case of uncertainties or overly complex situations, SMEs are advised to get help from competent individuals – for example, those working for companies specializing in market risk management, banks or audit and consultancy companies – in order to develop a comprehensive risk management strategy.

Possible options

There are several short-, medium- and long-term financial instruments for guarding against foreign exchange risks. In particular, it is possible to use what is known as hedging, i.e. an operation aimed at guaranteeing a fixed exchange rate, so that the SME does not assume the risk of losing money if the rate develops unfavorably. This may mean futures transactions (undertaking to buy or sell a given amount at a price fixed on a future date), call options (hedging of risk against payment of a premium) or more complex products associated with an options strategy.

Another possibility consists of carrying out spot transactions making it possible to immediately exchange one currency to another. Another solution is swaps, a combination of a spot transaction and a futures transaction concluded at the same time. And lastly, some specific types of insurance cover non-convertible or exotic currencies.

Over the long term, an interesting strategy might consist of diversifying, as much as possible, the SME’s export and import markets. By relying on different monetary zones or countries with different currencies, this can effectively limit potential dependence on a single currency.

Another solution frequently applied by companies present in several countries: reducing the currency risk by “balancing” income on export with charges also in foreign currencies. A Swiss start-up with a large number of customers over the border can, for example, centralize or group together its costs of marketing or communication overseas.

Last modification 27.02.2020

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