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Managing FX in Times of Uncertainty

The COVID-19 pandemic has sent shock waves through the global economy which has resulted in heightened uncertainty. And with currency market volatility beyond the levels experienced during the 2008 financial crisis, it’s significantly harder to navigate foreign exchange risk management strategies and  forecast currency fluctuations.

In a recent survey by Nordea, 51% of Chief Financial Officers said that FX is the risk that their organisation is least well-equipped to deal with.

Faadil Moti, Chief Executive Officer at ELA Asset Management, says without an effective risk management strategy, businesses could significantly damage their bottom line.

“In the current volatile business landscape, it is vital for businesses to create a bespoke currency strategy that is flexible and adaptable, as well as takes into account their unique needs and risks. This will be instrumental in helping to absorb some of the potential costs of recent market fluctuations.”

He says there are a number of strategies businesses can adopt to more efficiently manage forex risks in today’s rapidly changing global business environment. ELA Asset Management outlines 5 proven strategies that enable effective hedging against foreign exchange risk.

  1. Currency Hedging

This is a widely adopted strategy used to protect businesses against currency exchange risks. There are a number of tools used for hedging including forward contracts, FX orders and FX derivatives. Many businesses opt for a forward contract which lets a business buy or sell currencies at an agreed-upon exchange rate on a certain date within the next two years. This can be highly effective if a currency’s value is expected to fluctuate considerably.

  1. FX Automation

Once a nice-to-have, FX automation has become a strategic necessity in the post-COVID-19 operating environment. Too many businesses still struggle with older legacy systems which are not only time consuming, but can open you up to human error and operational risk. By automating processes, risk managers are able to simultaneously tackle all aspects of currency risk.

  1. Consider a multi-currency account

Trading and paying in multiple currencies is a complex and high-risk business. Currency fluctuations can have a significant impact on a business’s bottom line, the value of assets and liabilities, and cash flows. Multi-currency accounts provide a streamlined way for a business to manage different currencies, all in one place. This will not only save time, but make it easier to control finances.

  1. Spot transactions

Spot transactions offer an easy and effective way to manage foreign investment risk. A spot transaction is a single foreign exchange transaction, where you purchase and settle the amount on the spot or within two business days. It provides very little notice time, and therefore shorter window for risk.

  1. Look beyond banks

While traditional banks can handle currency conversions, smaller firms like ELA Asset Management will offer better rates, or waive commission fees for currency exchanges over a certain amount. By utilising ELA as an FX partner, you benefit from discounted wholesale exchange rates direct from the treasury with our multiple banking partners, saving you money on your transfers.

Final Word

The Coronavirus pandemic has thrown South African businesses into unchartered waters. But, there are steps businesses can take to effectively mitigate new challenges and risks. One such step includes creating a robust foreign exchange strategy which effectively helps manage cash flow and costs.

Failure to manage currency fluctuations can have a major impact on your bottom line. Additionally, not having your finger on the pulse means your business will constantly operate under uncertain conditions, which can be incredibly stressful.

As we enter our new normal in terms of market conditions, now is a great time to reevaluate your strategy.

“As our new normal begins to take hold, businesses need to take stock of their existing FX strategy and approach.They also need to be proactive in regularly assessing and reviewing risk exposure.” ~ Faadil Moti

ELA Asset Management will take the time to understand your business, help you identify how your business could be exposed to Forex fluctuations, and provide you with the tools needed to combat this. Through our longstanding relationships with banks and liquidity providers, we focus on negotiating the best exchange rates to minimise risk and maximise savings and offer bespoke solutions to various retail clients, specifically those dealing in imports and exports.

Get in touch with us for more information Email:info@elafsp.com or Tel: 011 243 2019