This document discusses currency risk management strategies for American manufacturers conducting international business. It begins by outlining the risks of currency volatility for exporters, such as increased costs for importers in other countries. It then provides tips for identifying different types of currency exposure and developing a risk management strategy. This includes understanding pricing impacts when transacting in dollars, hedging techniques like forward contracts, and choosing an experienced foreign exchange partner to tailor solutions to business needs. The overall message is that as globalization increases currency risk, manufacturers must take steps to protect their bottom lines from unpredictable currency movements.

1. Currency Risk Management for American Manufacturers
Today’s technologies are enabling companies,
large and small, to do more international
business than ever before. Cross-border
transactions that would have once taken weeks
or months to coordinate, can now be done
with the click of
a mouse. The
benefits are
vast, but it has
never been more
important to
remain vigilant in
protecting your
business from the
currency risks inherent to conducting global
trade. In this article we will discuss the risks
associated with currency volatility, plus how to
create a strategy for protecting your bottom
line and managing foreign exchange risk.
Exchange rate volatility refers to the increase
or decrease in the value of one currency in
relation to another; it measures the amount by
which the values change and the frequency in
which they change. In a simplified context, we
can measure currency volatility as the percent
change in value between two currencies over
a defined period.
As U.S. manufacturers have seen during the
recent periods of dollar strength, what this
means for an American company exporting
products to Germany is that the cost of the
products to a German importer would have
increased by over 20% in the last year.
Understanding currency volatility
Your German importer may even decide to
take their business to a supplier in another
country, where the goods are comparatively
less expensive. If you were instead exporting to
the United Kingdom, Mexico, Japan or Canada,
the results were similar:
Christian Spaltenstein
General Manager, Americas AFEX
23.11%
8.48%
15.75%
20.66%
21.10%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
EUR GBP CAD MXN JPY
Calculated using interbank rates. Percent change in
currency value against 1 USD between July 2014 and
June 2015.
In recent years,
volatility in the
financial and
FX markets has
been tempered by
monetary policies
of central banks,
with quantitative easing (QE) and monetary
expansion providing liquidity that the banks
couldn’t. As fiscal policies normalize, following
the end of monetary expansion and QE in
developed markets, it is widely expected that
increasing interest rates could lead to further
volatility in the financial markets.
It has never been more
important to remain
vigilant in protecting
your business from the
currency risks inherent
to conducting global
trade
It is widely expected
that increasing interest
rates could lead to
further volatility in the
financial markets

2. Perhaps you are conducting cross-border
business, but you’re sending or receiving US
dollars. You may believe, in this case, you are
not at risk. Think again. While the US dollar is
used most commonly in transactions around
the world, either as an official currency or
complementing a country’s official currency,
sending or receiving this benchmark currency
does not eliminate
currency risk in global
trade.
Even when transacting
in dollars, American
businesses should
understand that pricing
is affected by exchange
rates, because hidden
buffers are often added
to international prices in
order to protect profits
from currency volatility. If
you are accepting dollars
from a foreign investor,
it’s crucial to consider
the true local-currency
cost to the buyer in order
to remain competitive.
Furthermore, if you are importing supplies from
abroad, you need to determine your domestic-
currency cost of sending the supplier’s local
currency for your purchase. You can request
dual-invoicing from your supplier, whereby
they will provide you both an invoice in US
dollars and an invoice in their local currency.
From there, you can easily determine which
payment will cost you the least, considering
the exchange rates and any associated fees
for sending the funds.
Lastly, if you are sending or receiving foreign
currencies, then your FX exposure is more
Determining if you are at risk obvious. A host of factors – from interest
rates to political stability – all affect the value
between two currencies and the price you
ultimately pay your foreign suppliers or charge
your international buyers. The change in value
between two currencies, from the moment you
decide to buy products abroad and agree your
price, to the moment the business transaction
later takes place, can have a strong bearing on
the price you pay. Even a window as small as
a few months can have a big impact on your
bottom line. To reduce
this risk, you should
explore tactics for FX
hedging.
Hedging your FX
exposure
It’s a common
misconception that the
goal of hedging is to
generate profit, when the
real benefit of hedging
is to protect your
business against losses
caused by currency
fluctuations. Creating a
plan to manage your FX
risk allows you to spend less time monitoring
FX markets, and more time to focus on what
matters most – your business.
Especially when foreign exchange is not part
of your core business, it is particularly risky to
gamble with your company’s profits by placing
un-hedged bets on the expected trend of a
particular currency pair in the foreign exchange
markets, where volatility has the unfortunate
ability to instantly wipe out the profits of an
unprotected business. Instead, you should
mitigate your risk using a variety of hedging
tools and rely on a reputable industry expert
for guidance.
Even when transacting in dollars,
American businesses should
understand that pricing is affected by
exchange rates

3. The first step when creating a strategy for
managing FX risk is identifying your exposure.
Foreign exchange exposure exists when the
valueofyourexpectedcashflowsdependsupon
the value of a foreign currency. Matching your
strategy to your FX exposure is fundamental
to the success of a risk management strategy.
Foreign currency exposure can be classified
in three primary categories, and all of these
elements should be considered:
•• Transaction exposure involves an actual FX
transaction, as with foreign-denominated
payables or receivables.
•• Translationexposurerelatestothetranslation
of the value of foreign-denominated assets
and liabilities in domestic accounting reports.
•• Economic exposure refers to the effect
of unexpected future cash flows, such as
unexpected changes in foreign exchange
rates, on the value of your business.
Identify your FX
exposures.
Define your Risk
Management
Policy.
Evaluate and adjust
for any changes in
the markets.
Align your policy
with your financial
budgets or
objecvtives.
Choose hedging
products best
suited to your
needs.
Consider the following process when
implementing a risk management strategy:
Creating a risk management strategy
Implementing a risk management strategy
and utilizing hedging tools to control your
foreign-currency pricing or receipts will also
allow you to create more accurate budgets
and forecasts. Ultimately fostering long-term
sustainability enables your business to become
more successful in the global marketplace.
There is no ‘one-size-fits-all’ risk management
strategy. At the end of the day, you must
decide what fits your business model, and what
doesn’t. When it comes to foreign exchange
markets, you need to have the right tools and
expertise to make an effective plan to support
your business objectives.
There is no ‘one-size-fits-all’ risk
management strategy. At the end of
the day, you must decide what fits your
business model

4. Conclusion
All manufacturers conducting cross-
border business are exposed to currency
fluctuations. Currency volatility is no longer
a concern only for large multi-national
corporations; increasing globalization and
advances in technology are profoundly
impacting the ability for manufacturers to
connect with suppliers around the clock
and around the world.
By understanding currency volatility, and
taking steps to hedge your risk and create
a sound FX risk management strategy, you
can ensure your business is protected from
unpredictable movements in the currency
markets. To identify areas where your
business may be at risk, and to learn about
possible solutions that can help protect
your bottom line, speak to a trusted industry
expert.
Choosing an FX partner
In our turbulent global business
environment, it’s more important than ever
to recognize there are resources available to
help you manage currency risk and protect
your business from volatility. A foreign
exchange specialist can help you navigate
these resources and ensure you meet your
goals. Whether your aim is to reduce costs,
eliminate risk or take advantage of favorable
market movements, you can tailor your
strategy to your specific objectives. When
choosing your FX partner, be sure to find a
trusted expert who can provide you the best
available service and features, including
market expertise, reliable platforms and a
comprehensive portfolio of products and
tools.
A sound foreign exchange specialist
should firstly conduct a thorough review
of your business – including, among other
factors, your appetite for risk, your payables
and receivables, and your overarching
objectives – in order to accurately assess
the best solutions for your requirements.
After your consultation, your currency
specialist should have a full understanding
of your anticipated exposure, and they
should provide flexible recommendations
and insights about managing your
international payments and receipts. The
strategy should be exactly tailored to your
needs, and your FX provider should review
with you a combination of hedging tools
that can offer you the best results, from
traditional Forward Contracts and Rate
Orders to more sophisticated FX tools.

5. © 2015 Associated Foreign Exchange Holdings, Inc. All rights reserved.
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About AFEX
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dates back to 1979. With offices throughout the Americas, EMEA and Asia Pacific, we operate
seamlessly 24 hours a day, 7 days a week, in over 200 countries, trading more than $15bn in
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With a diverse client base of more than 25,000 active commercial clients including importers and
exporters, educational and financial institutions, small businesses, multinational corporations and
individuals, we recognize the distinct requirements of each of our clients. We take considerable
pride in creating unique and strategically adept global payment and foreign exchange solutions
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whatever your goals, you will have a team of experts working in your best interests.
To learn more, please call +1 800 986 4589 or visit us online at afex.com.