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Overseas trade can benefit your business, but you’ll also have more to worry about – will the foreign exchange rate raise costs and lower your revenue? Can the business sustain with FX rate fluctuation? How do you prepare to make or receive transactions in foreign currencies?

 

If you find yourself asking these questions, here are some ways to manage your risk:

Understand your risk

There are different types of foreign exchange risk arising from translation exposure, economic exposure as well as transaction exposure.

 

Translation exposure can happen when you convert currency in your business reports. You can manage this by showing your report in multiple currencies.

 

Economic exposure can happen if your business operates in more than one country, and you can manage it by using a variety of financing sources, operating in more than one place, or carrying out risk-sharing agreements.

 

Transaction exposure can happen if a business transaction is done in foreign currency. For example, your Malaysian business has a payment USD due in a few months’ time. If MYR has weakened by the time your payment is due, you could end up paying more MYR than you’d planned.

 

This article is mostly on ways to manage transactional exposure, but it’s important to understand how these risks that can affect your business, so you can make decisions to protect it.

Open a foreign currency account

A foreign currency account is helpful if you have receipt or payments in currencies other than MYR. By opening a bank account especially for their currency, like a CIMB Foreign Currency Current Account, you can receive and keep the foreign currency in this account and convert it into MYR later at your desire exchange rate.

 

Similarly, you can buy foreign currency cheaper when the exchange rate is in your favour and keep it in this account for future payment. This will help to better manage your FX risk exposure against currency fluctuations.

Enter into a foreign exchange hedging contracts

You can offset currency risks with a foreign exchange hedging contracts, such as FX forward contracts or FX option contract With a FX forward contract, you can lock in a fixed FX conversion rate now for foreign currency payment / receipt due for settlement at a later date. With FX Option, you can pay for a premium cost to lock in a pre-agreed FX conversion rate which subsequently if the prevailing market FX rate is in your favour, you can choose to not exercise the FX option. This helps in provide more certainty in managing your cost and future cash flow.

 

CIMB has a range of Foreign Exchange products that can be useful to help you manage your business.

 

Trading with an overseas partner always comes with some risks, but you can manage them with careful planning and staying up-to-date on news that might affect currency fluctuations.

 

This article is brought to you by CIMB as part of our ongoing efforts to raise the level of financial literacy among Malaysians. Financial knowledge and understanding are key to making well-informed and meaningful financial decisions towards positively improving welfare and well-being of communities. This is one of our many efforts to achieve CIMB’s purpose of advancing customers and society.

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