Risk management in foreign exchange shouldn't be a foreign idea: carefully weighing operational risks and strategic options when going global can make all the difference between success and failure. Political, social and economic variables must be considered.

• Author: Gibbons, Ryan
• Position: TREASURY

Many who conduct business overseas have experienced first-hand the currency market's wild ride. As volatile as the markets are, it's scary to think about how exposed any given company may be, and the risks associated with doing business around the globe. Companies large and small often don't realize what they've gotten into, and the associated risks to the all-important bottom line.

Any treasurer or chief financial officer knows there are both operational and strategic risks and managing these risks involves strategic thinking. Every company is different and appetites for risk vary. What works for one company will not work for another. Each needs to determine how to manage that risk and match its business objectives with the associated marketplace risk.

While risks can come in a variety of forms, there are three important variables that businesses should consider when developing foreign exchange strategies: Political, economic and social.

Political Risks. Many companies in the mining industry have expanded into Venezuela, a country that is often tapped for its oil reserves. A decade ago, the country was stable and conducting business with companies around the globe. With the election of its current president, the free-market system has been hindered. Moving money in and out of Venezuela is more challenging and certainly riskier. Companies conducting business in that market need to develop solid foreign exchange strategies to best protect their interests, and they need to be ready to adapt those plans due to the ever-changing environment.

Economic Risks. Economic risk can vary from country to country. For instance, when conducting business in Canada, it is important to understand how the commodities market affects the economic makeup of that country. Can growing markets such as China and India continue to expand at the current pace? How long will the United States recession continue and how will it affect other global economies?

Social Risks. Some global operations risks also revolve around societal norms and copyright laws. Consider golf club manufacturers. Most of the major players in the industry moved their manufacturing plants to China because of the inexpensive manufacturing and labor. The downside is that many of the items are copied and hit the market at the same time as the name (and higher-priced) brands. Companies have gone to great lengths to try to protect their intellectual property secrets during the process with little...