How to mitigate currency risks during the COVID- 19 crisis
By originalsWorld 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.
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.
Managing Exports Risk In The Food Industry
If the Chinese Yuan weakens relative to India Rupee (INR), import of Chinese toys in India becomes relatively cheaper and therefore adversely affects the sales of Indian toy manufacturer.
Many businesses are going global! The expansion of any enterprise has not entirely flourished without indulging in the export function. There could be many reasons for exporting your products, ranging from better prices & more significant margins to market niche & business share. Whatever your reasons are for the export business, you need to be prepared for the jittery wind along the way. It has high risks of transportation, demographics, cultures, stereotypes, laws, and lack of time management for every industry. It is imperative to manage those risks to grow your business through exports.
As far as the food industry is concerned, many developing nations largely depend on their food exports. With high dependence comes excellent preparation! They need to ensure food safety and quality, meaning their items should reach their buyers in the global economy as per their standards. Keeping the global supply chain intact and every country playing its part by maintaining food control measures can manage it. If it is a balanced fit between industries and the Government, then the risk factor is minimized.
Budgeting is an export-risk factor. It depends on foreign currencies that keep fluctuating. A company’s budget could see an incline or decline based on the rapid variation of forex rates. However, in reality, the currency fluctuations even impacts companies with no dealing in international markets. For instance, a domestic toy manufacturer, who is competing with traders importing toys from China, is also exposed to fluctuations in the prices of Chinese Yuan (CNY). If the Chinese Yuan weakens relative to India Rupee (INR), import of Chinese toys in India becomes relatively cheaper and therefore adversely affects the sales of Indian toy manufacturer.
The other types of risks involved with exports can be either related to payment, transportation, customs procedures, or insurance …
However, in reality, the currency fluctuations even impacts companies with no dealing in international markets. For instance, a domestic toy manufacturer, who is competing with traders importing toys from China, is also exposed to fluctuations in the prices of Chinese Yuan (CNY). If the Chinese Yuan weakens relative to India Rupee (INR), import of Chinese toys in India becomes relatively cheaper and therefore adversely affects the sales of Indian toy manufacturer.
If you export the product without clearing the debt first, there is the risk of non-payment. Especially when you are dealing with new clients with no prior credibility, it is best to receive cash in your account before supplying. In the case of a regular client, you may afford to take such small-scale risks based on previous experiences.
“What if your client refuses to pay you the amount before receiving the product?”
Credit sales constitute a significant risk involved in the export industry. If you shipped a container of grains, for instance, on a 20 days’ credit, and the party refuses to lift stock from the shipment yard due to any given circumstances. This interruption will delay the payments and disrupt your cycle of debts. There could also be a scenario where your client claims the delivered product is unsatisfactory; hence, the fee is not cleared in time. We can not emotionally or morally influence the buyer in export business, whether it is only the food industry or as a whole. However, if it was a local customer, we could set up a real meeting in an instance and resolve the issue.
What if your client refuses to pay you the amount before receiving the product? Many people in the trading business and particularly in the food industry use a Letter of Credit. This document is a financial instrument that is secure for both sides without any risk. The payment mechanism in the export business usually revolves around the Letter of Credit. We can manage this export risk efficiently by using this instrument.
There are many risk factors, but if one learns how to overcome them or manage them, rest is only a heavenly story. Generally, all industries face risks, and the food industry is no different. The only thing that matters the most is the management of those risks. You could manage them by avoiding credit, introducing a stable exchange policy, ensuring safer financial instruments, and maintaining the highest level of quality.
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Ali Iftikhar
Ali Iftikhar is a Blogger from Pakistan and a Sales Manager with the experience spanning over a decade.
