Page 24 - Logistics News - March_April 2023

CURRENCY RISK

Mitigating currency risk

in international trade

By Linda Bird-Duxbury, Director at Leading Edge,www.leadingedge.mu

The average daily trading volume of global foreign exchange has surged to approximately $7-trillion
and is by far the biggest market in the world.If you are involved in any aspect of international
business, be it freight, international trade, insurance, warehousing and/or customs clearance, you are
exposed to currency fluctuation.

any people in the supply chain feel that payments, imports, export earnings and possibly the
currency and exchange rates are a topic only payment of taxes in foreign countries should all be taken
M for bankers and their finance departments to into account. Additionally, the payment terms offered to
give consideration to and many businesses are exposed to international clients and the cost of banking should also
currency risk without evening realising it. With recent wild be considered.
swings in global currencies, exchange rate risk is very real
and many companies should give serious consideration to Managing your exposure to currency risk –
mitigating their foreign exchange losses. should include the risk exposure before a deal, purchase
or transactions are agreed upon and the actual risk that
Managing currency risk can bring benefits to your exists after the deal is completed. Therefore, you would
business by protecting your cash flow and profit margins. need to have an understanding of pre- and post-shipment
South African exporters benefited during the COVID-19 transaction risk and the level of risk to which you are
pandemic through the depreciation of the South African exposing your company. Transaction risk is the simplest
rand against other major currencies. When converting global currency risk to measure and manage. These occur because
currencies such as the US dollar into ZAR, these companies of the timing difference between contractual commitment
made unexpected additional profits as a result. and actual receipt of funds. Transaction risk can be hedged
with financial instruments including currency futures, swaps
The South African Reserve Bank allows South African contracts and/or options. Hedging means that you use
exporters to hold foreign currency accounts in South Africa. financial instruments, such as currency or FX forward cover,
This provides benefits such as paying for imports and/or to lock in the currency rate so that it remains the same over a
freight from a Corporate Cash Management (CCM) account specified period.
or Client Foreign Currency (CFC) account, which eliminates
hedging of ZAR to USD. However, this benefit is only Spot cover – refers to foreign exchange transactions
extended to exporters and, often, due to cash flow issues, where one currency is bought or sold against payment
many South African exporters have to convert their foreign in another currency at a specified rate, with settlement
exchange earnings immediately upon receipt. taking place two business days later. The two-day
settlement process, commonly referred to as ‘spot’, is an
Steps to managing your business’s currency risk international practice and is due to differences in time
Understanding where and how currency fluctuations affect zones and the time required by banks to ensure that
a company’s cash flow is not as straightforward as it may settlement occurs correctly.
L O GI S T I CS NEWS the political aspect of the US elections to the economic issues currency payments or receipts need to be processed, one-
seem. Many different factors influence exchange rates, from
Same-day and next-day value deals – where urgent
relating to BREXIT and macroeconomic trends.
day value or even same-day value exchange rates may be
provided, depending on the currency cut-off times (typically
Understanding your operating cycle – is essential
to understanding where the forex risk exists. Freight

22 M A RC H/A P R IL 2023 11am for same-day transactions).
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