“Measuring And Managing Foreign Exchange Exposures: History And Markets Can Guide You”

Changing money from one currency to another and moving it around to different parts of the world is serious business. Laurence Hayward, a senior foreign exchange advisor explained how that really worked.

Hayward has 33 years of experience in the foreign exchange and rate markets as a banker, broker, trader and market/advisor in several banks around the world. All of this experience isreflected with all his thoughts about the currency risk and also how the market really moves.

Foreign currency is something that needs to be taken seriously. First of all because is not only related to companies but also to every single person; it is something we deal with day a day, even though we don’t normally see it. From Hayward experience he says that you can totally be aware of the risk offoreign currency and hedge against it, it is only a matter of what interest you put on it.

To really understand how foreign currency works we should go back to the time after World War II when it was the begging of an organization that had as an objective to stable exchange rates. The name of this organization is the International Monetary Fund which started with 29 countries and by July 2009it had already 186 member countries. The IMF started created agreements in the organization and one of those was The Bretton Woods Agreement that established that each IMF member country set a par value for its currency based on gold and the US dollar.
After a while the gold started to lose its importance and the dollar was the main currency and became the benchmark for trading currency. Afterthe US Dollar there were some other strong currencies like the Euro, Yuan and more but none of them have had the power to become as important and strong as the US Dollar.

All this preview explanation is nothing compare to all the history behind currencies in the world, how they become important and how they were matched to facilitate international business, but here it goes one of Hayward’spoints when he said that it is extremely important to people in the business world to be aware of all of this. He mentioned: “I don’t think it’s reasonable for me to expect people to do something they don’t feel comfortable with. So I take the education approach-educating people who want to learn before they leap.” For me what he means is that if someone does not want to learn it is more difficult totry to explain what are the risk and the exposure of currency.

Let’s begin defining currency risk; risk, for instance is the ‘exposure to anything with the potential to produce negative numbers in the company.’ This risk in international business comes when companies expose themselves to changes in currency while buying, selling and gaining less for doing it with the different currency thateach country has and the fixed or flexible rates they used.

It will be perfect to avoid any kind of currency risk and in fact it is possible. An important tool for a company to hedge risk is to have a bank to work with them in every kind of transaction. After having a bank to rely on we need to establish on every contract the company does which payment is going to be used; for instance there arefour main foreign exchange markets that can be applied.

The first foreign exchange market is the spot market in which contracts bought and sold are immediately effective, paid in cash and deliver right away. Second is a forward market use something totally opposite, the payment takes more time and it is under a contract with forward discounts and premiums, discount exists when the forwardrate is less than the spot rate and the premiums when it’s greater. Next we have the options, the right, but not the obligation to buy or sell a foreign currency within a time period or on specific date at a specific exchange rate. The last one is futures; this foreign currency is similar to the forward market with the exception of the exchange rate that is established from the beginning with the...