Insight on the recent impact of Britain's exit from the EU.
Exporters can avoid foreign exchange exposure by using the simplest non-hedging technique: Price the sale in a foreign currency, and then demand cash in advance. The current spot market rate will determine the U.S. dollar value of the foreign proceeds. A spot transaction is when the exporter and the importer agree to pay using today’s exchange rate and are willing to settle within two business days.
Another non-hedging technique is to net out foreign currency receipts with foreign currency expenditures. For example, the U.S. exporter who exports in pesos to a buyer in Mexico may want to purchase supplies in pesos from a different Mexican trading partner. If the company’s export and import transactions with Mexico are comparable in value, pesos are rarely converted into dollars, and FX risk is minimized. The risk is further reduced if those peso-denominated export and import transactions are conducted on a regular basis.
With every anticipated interest rate adjustment, we notice an increase of jitters among our clients. If the Fed raises interest rates, will that put a drag on GDP growth or even crush it altogether? They could opt to wait, but such a holding pattern seems unlikely as it could lead to inflation with easy money and “runaway” expansion.
In one article, "What to Expect as the Federal Reserve Decision Nears," author Jeffrey Moore asks the burning question: which way will the Fed lean in order to do the “wrong” thing?
The implications for global business are huge. An increased demand for the greenback will widen the already appreciable gap between the USD and other currencies. As other currencies continue to weaken, this will threaten the earnings of domestic companies generating business abroad.
But before the dust settles, smart companies must decide how to position themselves for rising rates. It’s a matter of when, not if.
How Smart Managers and Board Members Respond to a Potential Interest Rate Hike
“Smart” companies—no matter what size—are doing at least three things to prepare. They always have, to varying degrees. But now they’re doing them with stepped-up urgency and energy:
- Evaluate their company’s debt service and capital structure
- Optimize capital structure around goals and limits
- Take action early
Smart companies also respond to events in the economy by continually reevaluating their position in light of new information. They ask key questions early — and often.
- How is my company servicing its debt today?
- What portion is fixed or floating?
- Will that change if we do nothing? Are there covenants that may take effect under certain conditions? Will those conditions get triggered in a rising rate environment?
- What about my company’s debt/equity mix?
- Have I considered financial instruments that may improve the capital structure?
And smart companies don’t wait until all of the uncertainty is taken out of the equation (that is, after rates rise or after the dollar strengthens or weakens). They know that by then, it’s too late. Instead, they assess their current position, determine the optimal positioning, and act early. Smart companies build risk management into their operations, and the process of assessing, optimizing, and acting is ingrained in the company’s DNA.
The Benefits of a Good Assessment
After assessing its strengths and vulnerabilities, a company must determine the optimal positioning to benefit from (or avoid the downside of) potential events. If the economic context never changed, companies would never need to adjust their balance sheets or capital structure. It is precisely because economic conditions are uncertain–and constantly in flux–that smart companies position themselves to benefit optimally.
Nobody knows exactly what will happen, but every company can be prepared for changes in the economy whether or not they’ve forecast correctly.