Since Jan 2, 2017 the dollar has weakened from 7.1 DKK to 6.6 DKK as of June 26, 2017. The fluctuation may not be considerable, but for a corporation with exposure to the US dollar, such fluctuation will impact the net result. An import business can increase their revenue and capitalize on the higher value of the Danish krona; however an export business may struggle to compensate for the weaker dollar. “Just to transfer the increased cost of currency exposure to a price increase for their customers is a short-sighted solution”, says Niels Christensen, Chief Analyst at Nordea Markets.
Regardless if you are an importer or an exporter, the fluctuations in currency markets create uncertainties for the businesses and headaches for their CFOs. Any given international money transaction can create widely different consequences for the profit margin.
The currency strategy
By putting in place a currency strategy that involves hedging and thereby mitigating the risk of currency fluctuations impacting negatively on the business, is a way forward explains Niels.
“There are voices out there that claim that currency hedging is creating an artificial result that makes it harder to do a thorough analysis of the business” Niels continues. “My view as an analyst is that a currency hedging strategy that allows management to get stability and predictability, gives them the opportunity to focus on the continued growth of the business.”
Not every firm with exposure to the international markets may benefit from implementing currency hedges. Niels explains: For any given firm with international transactions some may be limited in their currency exposure and not need to hedge, but as a minimum they should at least have reflected on what impact currency fluctuations may have on the business.
3 things a currency strategy should include:
- Determine how currency fluctuations will impact revenues, cost and result
- Outline what level of risk the company is prepared to accept
- What options the company have to hedge the currency risk