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Best Practices Approach to FX Risk Management

Sean Coakley October 5, 2016

With the growing importance of international markets and increasingly rapid shifts in global capital flows businesses are finding themselves increasingly impacted by developments in financial markets that lay outside of their normal day to day planning.

Unforeseen events can put businesses at a significant disadvantage and lay waste to even the best laid out strategy. More and more businesses are looking at developing formalized processes for managing the risk they are exposed to through their international operations. The intention of this piece is to outline in brief what a potential best practices approach to FX risk management would look like.

One of the key advantages of working with Cambridge is that we walk our clients through the process of setting up a formalized risk management strategy. Like a financial plan, this approach provides a framework for businesses to reduce their risk exposures and manage the uncertain environment they find themselves in, helping them enhance their overall financial performance and improve their competitive position against operations that do not follow as robust an approach.

 

hedging-process

 

Like life, market outcomes are uncertain and variations in exchange rates can lay waste to even the best business. The point of a sustainable hedging program is to develop a framework that eliminates the negative implications of downside movements in foreign exchange movements while allowing a business the flexibility to capture upside movement and overtime enhance their effective exchange rates above what is laid out in their budgets.

 

annual-average-of-daily-price-movements

 

The goal when we work with our clients is to take a deeper look into their business, their competitive position, margins, cash flows, and objectives. Using this information we develop a systematic approach to mitigating the risk they face so that over time they can flourish and continue to build their business.

 

proposed-hedging-schedule

 

The end result is a business with a road map to guide it through market uncertainty, allowing managers to significantly enhance their overall financial and operating performance. Should your business be contending with similar challenges please feel free to connect.

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