How to Reduce Foreign Exchange Risk and Costs

Consider this — you own a business in the United States but want to fill your inventory from a Japanese supplier. You sell some of those products to customers in Canada, and you occasionally receive orders from various European nations.

These transactions involve three different currencies — the Japanese yen, the euro and the Canadian dollar — which you'll need to convert back into the U.S. dollar when managing your business and declaring revenue. The foreign exchange market is prone to fluctuation, so your business needs to plan for the risk involved.

Foreign exchange risk is potential loss a business faces when completing transactions with companies in other nations. Two currencies may hold similar value at the time of the purchase, but their value may diverge by the time the transaction finishes processing. Currency changes can even prevent a sale altogether.

“Doing business globally — and in foreign currencies — can be complex and risky,” says David Grimaldi, foreign exchange sales consultant at Synovus. “As business owners and executives navigate international markets, they need as much control as possible. Opening a multicurrency account (MCA) makes managing payables and receivables simple and straightforward, and helps companies reduce their risk exposure.”

It's imperative that businesses understand how to navigate the different types of currency conversion risk and how MCAs can help.

There are three types of foreign exchange risks.

Foreign exchange risk is present any time your business purchases or sells products across borders. The risk can impact anything from the value of the sale to your entire company's value. There are three common types of risk — transaction risk, translation risk and economic risk.

• Transaction Risk

  Transaction risk comes from exchange rate fluctuations. Your business will exchange U.S. dollars for the type of currency the other business' country uses — let's say the euro. You and the seller agree to a price knowing the comparative value of the U.S. dollar and the euro at that time. However, it's common for another 30 to 90 days to pass before the transaction processes. Your settlement agreement is rigid, but foreign exchange rates can still fluctuate. If the euro's value increases during the time between settlement and payment processing, your U.S. dollar is less valuable in the seller's nation. You'll have to exchange more U.S. dollars than you initially planned to meet the euro's value.

• Translation Risk

  Translation risk is a type of foreign exchange risk relevant to businesses that own international subsidiaries. If you own a company in the United States that acts as a parent company to others in England, South Africa and Japan, each of those subsidiaries will report revenue in its respective country's currency. You will have to convert each subsidiary's revenue to U.S. dollars.
  
  If the currency value decreases in any subsidiary's country, that subsidiary will have less to contribute toward your domestic company's earnings. Currency value can shift from quarter to quarter. Your Japanese subsidiary could earn the same amount of yen in two consecutive quarters, but if the yen's value is less in the second quarter, it will convert to fewer U.S. dollars than the first quarter's revenue yielded.

• Economic Risk

  Currency changes can impact your company beyond the scope of a few individual sales or revenue reports for a quarter. Exchange rate fluctuation can impact your entire market value.
  
  If exchange rates increase, foreign companies may find it too expensive to do business with you. Alternatively, the exchange rate could go down in another nation, prompting a foreign customer to move their business to a company from a country where their money will be more valuable.
  
  Exchange rate fluctuation impacts your business' leverage, too. Foreign buyers may demand lower prices to cover their own risk. Likewise, foreign sellers may demand more if your nation's currency loses value compared to theirs.

Multicurrency accounts make global payments easier, less expensive, and more secure.

If your company exports or imports, employs workers worldwide, or you’re considering global expansion, there are ways to make your payments easier and more secure. MCAs are a must-have for convenience, cost-savings, and risk management.

MCAs reduce foreign exchange costs, protect against market fluctuations, and safeguard against foreign exchange risk.

“For businesses sending or receiving payments in foreign currencies, MCAs are the way to go,” says Dr. Jeffrey Beisler-Snell, head of international banking for Synovus. “MCAs enable businesses to send and receive wire transfers in one of five designated foreign currencies while reducing foreign exchange (forex) costs, protecting against market fluctuations, and safeguarding against forex risk.”

To open an MCA, you choose your currency option for each account. If you regularly transact in more than one currency, you simply open different accounts for each currency. Once the account is set up, you make and receive global payments using that account. The benefits of MCAs are significant.

• Lowers fees.

  Holding and receiving funds in your designated currency eliminates the need to convert funds to U.S. dollars every time you make a transaction. This saves significant forex transaction and conversion fees and eliminates any hidden fees or inflated prices charged to “foreign” customers. You’ll pay for your goods and services in the desired currency, with no conversion required.

• Reduces currency rate volatility.

  Corporate treasury officers don’t like surprises, especially the inevitable currency changes inherent in global commerce. When locking in a conversion rate, you can hold foreign currency funds as part of your overall treasury strategy, paying for investments or purchases overseas and hedging against the risk of market volatility.

• Streamlines accounting and payroll workflows.

  You can invoice and receive payment in the same currency, which enables faster payments, tracking and reconciliation. You can buy in bulk, so you already have your funds available in the currency you choose. You’re also able to pay employees who live abroad in their native currency. Single-point access also simplifies account management.

Carefully consider multicurrency account options before selection.

All MCAs eliminate the need to convert foreign currency collections and payments to U.S. dollars when you make transactions, but not all MCAs are created equal. And not all financial institutions offer MCAs to small- and medium-sized customers. When considering a specific MCA, here’s what to look for:

• The right currencies

  Which currencies do you typically use, or will you use for future transactions? MCAs are currency specific — only one currency per MCA — so be sure you choose a treasury partner with the MCA options you need.

• U.S.-held funds

  Be aware that some banks only offer MCAs based in Europe, the UK or Canada. Using a U.S.-based MCA can be easier. For example, opening an MCA with a U.S. financial institution is like opening any other bank account, so it can be done quickly. Also, your domestically held MCA will be managed by U.S.-based representatives who are available during business hours you’re accustomed to. Holding foreign currency in a U.S.-based account also eliminates tax and compliance complications when repatriating funds, and U.S.-based accounts are FDIC-insured up to the maximum limit allowed by law.

• Transparency

  You’ll want access and visibility into your MCA via your regular banking web portal. And be sure you can purchase foreign currency in bulk, which makes regularly sending and receiving international payments simpler.

MCAs are sophisticated, yet easy-to-manage solutions for businesses that want to make global payments.

Synovus can provide the international banking expertise businesses need for global expansion, as well as assist in reducing forex risk and costs. Synovus MCAs are available in Euros (EUR), Canadian dollars (CAD), Pound sterling (GBP), Japanese yen (JPY) and Australian dollars (AUD).

If you’re interested in learning more about currency conversion or multicurrency accounts, complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.