World economics is rapidly changing around the globe because of the on-going COVID19 crisis. Currency rates are fluctuating rapidly and creating global unrest. Many countries and experts have sat together in dismay to work out the solutions to the resultant economic crisis. Currency risks during the COVID-19 crisis are alarming.
Only recently, the world economy had seen the Oil crisis due to COVID19. The money matters were brought under questions as the next possible victim of the virus. Patients are put in quarantine, and the populous at large is observing self-quarantine and social distancing practices to avoid the spread. There are border restrictions, travel bans, hotels and restaurants are closed. This unforeseen situation has created a demand shock for currency. Every corporation knows the currency risk could hurt their sales. Still, they are somewhat secretly hoping everything will turn out for the best in the future.
The worldwide supply chain is disturbed, and the end-to-this crisis is nowhere to be seen as of now. People are concerned and threatened by the endemic. Every businessperson is worried about what is going to happen soon. Outlets are closed; people are reserved about spending and going out. This situation has created a supply disruption for bills and notes. Also, the virus is supposedly spreading through hard cash. People are getting affected when they touch a contaminated currency note. Cashiers at banks are getting infected, banks are being sealed, and it is going out of control.
Mitigate Currency Risk – COVID 19
Comment Below, how COVID 19 has affected your local currency.
One can mitigate the currency risks during the COVID19 crisis by using a hedging instrument called forward contract. This contact locks the currency rate once agreed upon by both parties. This instrument is used by organizations when currency fluctuation is evident, and the deal is created to alleviate the currency risks.
The contracts made amid COVID-19 could carry additional risks as the customer might not be able to pay on the due date. The financial institutions will charge penalties for that delay, and both parties could suffer from it. Even after considering these risks, a Forward Contract is still the best practice to carry out in the pandemic.
Another hedging instrument provided by banks and other financial institutions is the FX options, and it is more flexible in its’ nature. There is one demerit to that with many demerits. The disadvantage is having to pay an upfront fee. However the advantages come in numbers, such as flexibility is phenomenal when comparing with Forwarding Contracts. The choice of FX options is another benefit, as many institutions provide FX options for the sales and purchase of your goods.
A business could reduce the currency risk if they don’t have to lock up their capital in the dealings. There are guarantees provided by your banks and you will not need to put up with collateral. These guarantees are Forex Facility Guarantees (FXG). Apart from these documented strategies, one can learn to predict currency risks when developing budgets for your company. You could lock the currency rate internally for your financial budget, to avoid unforeseen risks involved. Keep the predictions on the lower side as it is better to prepare for the worst.