Sunday, July 27, 2008

The Risk of Foreign Currency

Certainly foreign currency risk does not involve every industry and every business. Foreign Currency Risk really only effects businesses that either sell products or services in foreign countries or buy products and services in foreign countries. For example, right at this particular time given the weakness of the dollar and the strength of the Euro you are at tremendous risk purchasing products or services from a European source. What cost you about $1.00 around the year 2002, now costs close to $1.60. Some of this impact could have been minimized through hedging, but the dollar has been weak for quite some time and even the most accurate hedging programs will not outlast the current dollar drought. It is an important CFO Service and CFO Responsibility to put it’s client in a hedging program. The CFO knows that hedging programs can be formulated and found at most major banks.

Since I am a CFO that thinks like a business owner and given todays dollar weakness European investors will convert less Euros into more dollars to invest in US businesses. If you are selling your business you may want to consider a European buyer to maximize your purchase price. Of course if you are selling products or services the currency is currently in your favor.

Foreign currency risk can be significant especially when the dollar is extra weak or strong for an extended period of time. A business that has foreign activity needs to protect its downside when evaluating foreign currency risk as this one facet can cause Cash flow problems down the road.