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Currency headwinds are one of the major issues that businesses and individuals that conduct cross-border financial transactions must face. A small travel agency that books international flights and hotels will face forex turbulence. The large corporation that sources for supplies and machinery from other countries must be ready for currency conversion rates. Foreign students and expats must also deal with forex conversions when they move funds in and out of their home countries.

Many large businesses have dedicated Chief Financial Officers with degrees from the top universities in the country. The job description of the CFO is simple, "help the firm navigate the treacherous waters of currency conversions to find and maintain financial stability". However, many small businesses do not have professional or dedicated CFOs. This article seeks to provide three insights on how small business owners can avoid the currency headwinds that businesses with cross-border exposure usually face.

Understand how forex affects your business

The first step to using forex to hedge foreign business transactions is to understand how forex affects your business. For instance, if you run a travel agency that helps people to book vacations in foreign countries, your Australian clients are likely to pay you in AUD while you pay for their hotel reservations in EUR, USD, JPY, or GBP. For the purpose of instruction, let's assume that the AUD and USD trade at an equal exchange rate where USD1 equals AUD1.

If your client pays you AUD$1000 for a trip that planned for the next six months, you'll naturally expect to spend USD1000 to book the reservation. However, if the AUD falls in value by 10% before you make the reservation, the AUD$1000 that your client paid you is now worth USD$900. You'll most likely be forced to take your own money to augment the money paid by the client in order to secure the reservation.

Educate yourself on how to trade forex

You can involve yourself in the forex market by trading spot forex, forex futures, CFDs, and forex spread betting. You need to examine your forex needs in order to chose the best forex trading form that will suit your hedging purposes. Many small business owners now attend Forex trading bootcamps in order to learn how forex trading might help their businesses. Forex affects different businesses in different ways but the underlying fact is that a change in the value of a currency might force a business to face unexpected financial plot twists.

Hedging with forex futures won't do your business much good if you are supposed to be trading spot forex with the physical delivery of the foreign currency. You might need to join a good trading platform such as ETX Capital in order to use forex hedges effectively in your business.

In the case of the travel agency above, you'll want to consider buying forex futures in order to lock down the exchange rate for the AUD/USD currency pair in advance of when you need to make the reservation. The forex future gives you the right and obligation to buy/sell a certain amount of the currency pair, at an agreed price on or before the predetermined date.

Once you have purchased the forex futures, if the value of the foreign currency that you want to buy rises before the due date, you'll exercise your contract and buy the contract at the predetermined price; hence, you won't need to pay more money to facilitate the deal. Businesses with huge capital expenditures in foreign currency can save themselves from unnecessary stress with forex futures.

On the contrary, if the value of the foreign currency falls in relation to the AUD, you'll be practically be paying more than the prevailing exchange rate to fund the deal. Hence, you could exit the contract in order to take advantage of the prevailing exchange rate and you won't lose more than the money you invested on buying the contract.

Avoid being sucked into the forex labyrinth

Forex trading is supposed to be a hedge that protects your business from adverse currency conversion rates and currency fluctuations. However, you will put your business at great risk if you allow the prospect of profits for positive hedging trades to lure you into the forex labyrinth. You must not be carried away by focusing on gains from forex trades instead of focusing on your core business competencies.

Many large businesses have come to great ruin because their money managers started speculating with more money than they needed for safe hedging. Focus on your core business competencies, use forex to hedge your foreign currency exposures, and make sure that you are only trading forex with a fraction of your business capital.

 

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