Companies Can Manage Forex Risks
When manufacturers and service companies consider exporting to or importing from another country or building a factory abroad, they also have to consider how the volatility of a foreign currency is going to impact their bottom line, according to Dan Ryan, vice president of the foreign exchange and denomination sales group at Chase Bank.
Ryan said he always reminds clients that they are pursuing business in another country because of the product or the management team or the customer base — not because they’re hoping that other country’s currency is going to go one way or another.
Few, if any companies, for example, are going to decide to export to
If a company is going to, say, export to
“We try to help them figure out how much sales they have in foreign currency, how much expenses they have in foreign currencies, and then figure out what their business could look like under a couple of different scenarios of where the exchange rate might go,” he explained. “Then we develop a risk management program that helps them mitigate the foreign exchange risk.”
As long as a company remains internationally oriented, the foreign exchange risk is something that has to be managed on an ongoing basis. Ryan said Chase has a number of client companies in
But a lot of companies conduct all their international business in U.S. dollars and assume they don’t have any foreign exchange risk because all of their transactions are denominated in U.S. dollars. Ryan has found that’s not really the case. If a supplier in
“It’s not necessarily the case that you need to be managing the foreign exchange risk, but it would be preferable because then you know what’s happening,” he noted. “However, if your supplier or customer has an active foreign exchange management program in place, then that’s OK. The important thing is that somebody in that relationship is protecting that business relationship.”
Ryan helped Ron Townsend, president of Williams Form Engineering of Belmont, put hedges in place for the next three years that allow Williams Form to sell to Chase at a worst-case exchange rate the Canadian dollars it receives from customers every month.
“So he’s able to protect his business in
Townsend’s company manufactures heavy anchoring devices for the construction industry. His company has two contracts in
“Basically, depending on what the Canadian dollar is trading at at the end of any given month will determine whether our currency contract is what we call ‘in the money’ or whether we have to exercise on the option.”