In this interconnected world, we cannot overlook the importance of international FX transfer for high-risk companies like e-commerce, CBD, vape, online gaming, crypto trading, and adult entertainment. However, currency fluctuations can bring uncertainties, shrink profits, inflate costs, and add further complexities to the financial operations of high-risk businesses. Therefore, FX risk management is like a …
In this interconnected world, we cannot overlook the importance of international FX transfer for high-risk companies like e-commerce, CBD, vape, online gaming, crypto trading, and adult entertainment. However, currency fluctuations can bring uncertainties, shrink profits, inflate costs, and add further complexities to the financial operations of high-risk businesses. Therefore, FX risk management is like a backbone for high-risk businesses, without which they cannot optimally hedge against market volatility, which can turn minor fluctuations into major financial losses. If you don’t want FX risks to eat away at your profits, then it is essential to fully understand the prevalent risks in international FX transfer for high-risk companies, develop proactive strategies, implement hedging techniques and use reliable FX services.
This blog enlists some common FX risks, highlights the importance of FX risk management for high-risk sectors and suggests some essential strategies to mitigate risk exposure.
Translation risk can be explained as the risk of a change in currency exchange rates during an international transaction. Let’s consider an example: Suppose a person uses a forex trading platform to make an international FX payment in USD to a supplier who will receive it in EUR. But before the payment settlement, the market changes, and the USD appreciates, which means your business will now pay more than anticipated.
Another prevalent risk associated with international FX transfer for high-risk companies is translation risk. This risk occurs when a company with international operations consolidates its financial statements. Due to fluctuations in currency rates, the FX transfer translates differently in financial records, impacting the value of its assets, liabilities, equities, and income. This alters the company’s financial position, making it seem better or worse depending on market movements.
In simple terms, operational risks refer to the risk of loss due to failures in internal processes, such as poor compliance procedures, or external events, such as fraudulent activities. It can be explained with an example of a high-risk business operating in the vape sector, where a sudden change in compliance can cease its operations.
Wondering why it is essential for high-risk companies to implement FX risk management strategies? Let’s break it down. For any business, including high-risk companies, volatility can significantly impact pricing, revenue, profitability and financial stability. Moreover, high-risk businesses’ financial transactions are often under strict scrutiny and complicated international regulations can make it essential to have comprehensive risk management strategies. Not having strong risk management can force your business to increase pricing, eventually making your business less competitive. Additionally, it is also important to note that having well-structured risk management strategies can not only protect your profit but is also essential to stabilise revenues and ensure long-term financial stability for your business.
Don’t know which risk management strategies are right to shield against the risks of international FX transfer for high-risk companies? Worry not—here’s a detailed guide on which strategies to use.
A forward contract is the most commonly used risk management strategy to protect an international FX transfer for high-risk companies against FX risks. It allows businesses to lock in a favourable currency exchange rate for a future transaction. Businesses regularly involved in international payments to suppliers, employees, partners, etc., mainly use this strategy to reduce risks. How does this work? Suppose you are an online gaming company that periodically pays developers in India. With a forward contract, you can fix the FX rate a month ahead when the market is favourable. So, if the value changes during the period, your transaction stays protected from market risks, and the transaction will be completed on the specified date as per the agreement.
Natural hedging is another strategy that can prevent your high-risk business from losing money on FX transfers. It reduces high-risk companies’ exposure to currency risks by aligning expenses and revenues in the same currency to offset potential losses from FX rate fluctuations. This means if you sell your products and receive payments in euros, then you should also have business expenses in euros. So, if the euro’s value depreciates, the overall impact will be neutralised.
Getting a multi-currency account for your high-risk business can help you save currency conversion costs and additional fees every time you make an FX transfer. With a multi-currency account, you can get better FX rates and lower transaction costs. These accounts simplify international FX transfer for high-risk companies, allowing them to hold, receive and send payments in multiple currencies. So, no matter where your suppliers and customers are around the world, you can easily manage transactions while managing risks.
Always choose the FX service provider wisely! If your business largely depends on FX transfers, then the FX service you choose can make or break your business. Look for a provider that employs best practices for risk management and offers ongoing support to help you hedge against risks. Some FX transfer services also offer expert advisory along with AI-driven tools to help you track and predict market movements and optimise international FX transfer for high-risk companies according to the forecast.
If you are looking for reliable FX transfer services, Linea Global is here for you! We offer the most secure and fast international FX transfer for high-risk companies. Contact us today and explore our robust FX solutions!
