Five Impacts If a Company Does Not Hedge its Foreign Currency Risk
Minneapolis, MN | May 23, 2024 | By: John Trefethen, Director and Co-Founder
If a company does not hedge its foreign currency risk, it becomes exposed to several potential negative consequences that can have an impact on its financial health and operational stability. Some risks include the following:
Profit Volatility: If a company incurs costs in an unhedged foreign currency that appreciates, its expenses will rise in home currency terms, squeezing profit margins.
Financial Reporting Variability: Exchange rate movements can introduce significant variability into financial statements, making it harder for investors and stakeholders to assess the company’s true performance.
Liquidity Issues: Unanticipated currency movements can strain liquidity if the company suddenly needs more home currency to cover expenses incurred in foreign currencies.
Stock Price Volatility: Exchange rate fluctuations can lead to volatility in a company’s stock price as investors react to unexpected earnings impacts.
Supply Chain Issues: Companies that source materials from foreign suppliers may face increased costs or supply disruptions if they are not protected against currency movements.
In summary, not hedging foreign currency risk can lead to unpredictable financial performance, erode profit margins, create competitive disadvantages, and increase overall financial risk. These factors can ultimately threaten a company’s viability and growth prospects.
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Author: John Trefethen, Director and Co-Founder
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