Charting an international course: foreign exchange business strategies.

• Author: Gibbons, Ryan
• Position: Money Talk

Each day, I work with companies that brave the preverbal high seas and conduct business on an international scale. Whether you are already engaged in business around the globe or are thinking about expanding your market share, you should carefully consider the effects of the currency markets and how a good foreign exchange (FX) strategy can help your business mitigate some of its global risks.

Those with international business experience know that going global isn't as simple as selling your product in another country. Business owners and their finance specialists need to carefully evaluate what currency to invoice in, when to repatriate funds and how to mitigate some of the financial risks of doing business overseas. Global corporations are more influenced by foreign exchange rates than one might think. The rates can have significant impact on the firm's finances, especially when not managed properly.

With today's choppy economic conditions, some businesses are focusing more of their approach to corporate governance and managing their risk. Although there is light on the horizon, the current economy is leaving many feeling a bit seasick, and more than a few businesses are re-evaluating their global strategies when it comes to foreign exchange. The businesses that have adopted a constant risk management plan, when it comes to foreign currencies, have faired much better than those without a plan.

When thinking about foreign exchange strategies, I recommend businesses look at it as a risk management function and not merely an operations function. The key reason to focus on risk management is to protect and maximize profitability. When businesses simply look at FX as an operations function, often international transactions get treated by the accounts payable or accounts receivables department as just another payment that needs to be processed. This is dangerous because the foreign currency markets are volatile and if exposure is not actively managed, it can have a negative consequence on the firm.

For example, consider the payment of a $500,000 euro invoice. The average weekly market volatility in September for the EUR/USD pair was 8 percent. That means the USD equivalent of that invoice payment may have fluctuated by nearly $60,000. That kind of fluctuation demonstrates the need to approach foreign exchange from a risk management perceptive.

Corporate foreign exchange is a niche skill within the corporate finance department. Executives should...