Identifying foreign exchange risk

Identifying the Risk
Businesses that trade or have operations overseas are likely to be exposed to foreign exchange risk arising from volatility in the currency markets.

The most common cause of foreign exchange exposure arises from having to pay invoices for imported raw materials priced in a foreign currency or receiving foreign currency for your exported finished goods. However, exposure can also arise from:

• Your competitors having a cost base and/or selling their products in a foreign currency
• Assets located overseas
• Foreign currency borrowing or surplus cash balances of overseas subsidiaries
• Borrowing denominated in foreign currency

The impact that exchange rate fluctuations have on profitability will vary but in many cases it can be significant.

The following is a simplified extract from a profit and loss account of an exporter that receives revenues in a foreign currency. It shows the impact of, in this case a ten per cent adverse movement in the exchange rate.

The table shows that following a ten per cent adverse exchange rate movement, this company will need to double its turnover to restore profitability to previous levels!

Summary
For many businesses, the impact of exchange rate volatility can be significant. HSBC has a team of specialists available to advise you on developing an appropriate strategy for your business - please contact your HSBC relationship manager for further details.