This week I am pleased to share an interview of Christian Spaltenstein, General Manager-Americas from AFEX. Foreign exchange and risk management are strategic factors in doing international business. As an expert in these areas, Christian had much to share.
Christian, based on what you’ve seen what are some of the biggest misconceptions that companies have about international trade and risk management?
In my experience, one of the biggest misconceptions is that companies believe hedging currency risk is speculating, when in fact it is crucial for all businesses involved in international trade, not just speculators, to understand the very real impact of volatility in foreign exchange markets. Companies are often unaware that it is possible to create a strategy to protect against currency fluctuations. There are many hedging strategies available today, using a variety of different products like FX Options, Forward Contracts and cross-currency trading services, to name a few.
Secondly, many companies assume that they can only rely on banks to facilitate their foreign payments, often with little or no visibility of the price they’re paying. When companies instead use a foreign exchange specialist for their international payments, there is usually cost savings in addition to receiving expertise and guidance.
What mistakes do you see companies making when sending global payments?
The most common mistake companies make when they process global payments boils down to strategy. Many companies view making international payments quite simply as a necessary part of their operations, where they have no control or opportunity for savings. Rather than making ad-hoc payments, irrespective of market conditions when payments are due, I challenge companies to hedge against currency risk by planning ahead for their exposure and purchasing currency in advance. This allows companies to have a fixed price for their global payments and often provides cost savings as an added benefit. Foreign exchange specialists can provide invaluable guidance about expected movements in currency markets, allowing companies to get the best possible price.
What do you predict will happen in the 2015 foreign currency markets? How will this affect companies doing business overseas?
In 2015 we will see the return of market volatility, particularly in foreign exchange, at levels unmatched in the last couple of years, and there will be an uncoupling of some currency pair correlations. Last year there was a strong ‘buy USD’ trend. This year, as geopolitical events drive economic conditions and traders search for carry trades, various regions will grow stronger or weaker against the greenback. It will be crucial for companies doing business overseas to take steps to hedge their FX risk, wherever possible.
Additional regional pressures will come from key central banks entering different phases of their quantitative easing (QE) policies. The Fed is scaling back; the Bank of Japan promises further QE; and the ECB has recently announced unprecedented stimulus through a bond-buying program. Businesses will have to be more diligent in their risk management policies to protect against the volatility ahead, and they will have choose wisely where they want to do business. This will be particularly important for companies who did not consider foreign exchange risks at the time of their investments.
What opportunities do companies overlook when it comes to foreign exchange?
When foreign exchange is not part of a company’s core business operations, the opportunity to use FX as a place to add value to their service offering and differentiate themselves from the competition is frequently overlooked. By working with a foreign exchange expert, a company gains the ability to send or receive any tradable currency, often without ever converting back to their domestic denomination. What this means is that a US exporter can take payment from a European buyer in their foreign currency. It’s a huge opportunity to add value for their clients while hedging FX risk.
What are your thoughts on using the Bit Coin in international transactions?
A commodity must have specific characteristics to be called “money”. Particularly in international payments, there needs to be a reliable store of value or medium of exchange. Bitcoin simply does not have those attributes and, unless some major changes take place, probably never will. For example, if you wanted to hedge against volatility, you couldn’t do so with Bitcoin because there is no applicable interest rate. Bitcoin has no central regulator or issuer, which makes security very problematic. Reasons like these help explain the stock price plummeting from $1200 in 2014 to under $200 today and why Bitcoin isn’t a likely contender in the arena of global payments, but anything is possible.
Any final risk management advice for growing companies expanding into new international markets?
Navigating the seas of international laws and currency regulations is no simple feat. It takes a team of industry experts with a truly global footprint to understand the intricacies of sending and receiving funds across each country’s borders. Being legally capable of doing business in a given country or region does not mean that currency will flow in and out as easily as you expect. All countries have different laws regarding their currencies, and they are certainly not all created equal. The laws are subject to change at any time and vary from one country to the next. Especially in emerging markets, governments face immense pressure to protect their currencies against the central banking policies of more developed countries, most notably the US Federal Reserve. My advice? Either do your homework, or work with a trusted business partner who can do it for you so that you can focus on your core business.
AFEX is a global payment and risk management solutions specialist. The company has a client base of more than 24,000 clients including importers and exporters, educational and financial institutions, small businesses, multinational corporations and individuals. AFEX trades more than $15 billion annually in foreign exchange. Their website is: www.afex.com