Specialised skills and time needed to manage foreign exchange risk

In today’s tough economic environment – rising interest rates, double digit inflation, soaring fuel prices and currency volatility – South African business owners could be placing their businesses at unnecessary additional risk by opting for DIY foreign exchange management.

That’s the view of Stephen Rogers, head of Taquanta Treasury Solutions, a subsidiary of black-owned financial services group Taquanta Investment Holdings who says few businesses, regardless of their size, have the specialised skills – or time – required to effectively manage their forex exposures.

“If businesses are unable to employ these skills in-house, they should seriously consider outsourcing their forex risk management to a resource equipped to provide them with a holistic forex management solution tailored to their needs and circumstances,” he says.

Rogers points out that forex management is an essential, but non-core function of every business that either imports or exports goods and services.

However, because of the volatility of the rand and the fact that even a small move in the currency can spell the difference between comfortable profit and major loss, businesses are being forced to devote considerable time and effort to forex matters.

“The problem is that most don’t understand the complexity of the forex markets and the pitfalls of foreign exchange dealing. Many inadvertently become currency speculators and as any investor knows, speculation – particularly uninformed speculation – is risky,” he adds.

According to Rogers, it’s not unusual for the Rand to move in a 10 to 30 cent range on a daily basis. This means that people who hear the exchange rate on the radio and rush to the bank the next day – or even the same day – in the hope of getting that rate are likely to be disappointed.

In the first place, the rate will probably have changed.

Also important is the fact that in times of high currency volatility, the pricing from one bank to another could make a significant difference to the all-in price. In current market conditions, this could be as much as five to 10 cents against the US Dollar. Businesses should ideally arrange to have forex dealing facilities with at least two banks, which will allow it to trade with the bank that offers the best price.

Rogers says one of the most important requirements for the management of forex risk is information. Businesses need systems and skills to monitor the forex markets around the world on a 24x7 basis. They need to be able to make informed decisions based on the latest market news and information and to strip the emotion out of these decisions.

In addition, they need to develop a forex dealing strategy that dovetails with their overall business model and risk management policy. This would include having an actively managed stop loss level in place that will limit the damage of a depreciating Rand and pass on some of the upside should the Rand appreciate from the current levels

“Effective, informed and sustainable forex risk management involves more than forex dealing. It requires specialist skills. Unless these skills are present in the organisation, the entire business could be at risk,” he concludes.