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How can you minimize the impact of currency fluctuations on your supply chain?

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Currency fluctuations can pose a significant challenge for importers and exporters, as they can affect the profitability, cash flow, and competitiveness of their supply chain. However, there are some strategies that you can use to minimize the impact of exchange rate volatility on your business. In this article, we will discuss six ways to reduce your exposure to currency risk and optimize your supply chain performance.

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Robert Elman

Portfolio Manager, Director Wealth Management at Scotia Wealth Management
Marcio Uemura

FX Sales Specialist na 360T

1 1. Choose a stable currency

One of the simplest ways to avoid currency fluctuations is to choose a stable currency for your transactions, such as the US dollar, the euro, or the Japanese yen. These currencies tend to have lower volatility and more liquidity than other currencies, which means they are less likely to experience sudden and drastic changes in value. By using a stable currency, you can reduce the uncertainty and complexity of dealing with multiple currencies and exchange rates.

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Hemant Kumar PGDM CDCS

Trade Finance Professional @ RWood Resources | International Banking, LC Management
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There are two ways to minimize the impact of currency fluctuation in Trade finance: one is to select the stable currency, which is USD, in major trade transactions worldwide, and the other is to negotiate fixed price contracts. This will not only help with currency volatility but also with budgeting and managing expenses.

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2 2. Negotiate contract terms

Another way to minimize the impact of currency fluctuations is to negotiate favorable contract terms with your suppliers and customers. For example, you can agree on a fixed exchange rate, a currency clause, or a payment schedule that protects you from unfavorable movements in the currency market. You can also specify who bears the currency risk and how it is shared or transferred among the parties. By negotiating contract terms, you can avoid disputes and losses due to currency fluctuations.

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3 3. Use hedging instruments

A third way to minimize the impact of currency fluctuations is to use hedging instruments, such as forward contracts, futures contracts, options contracts, or swaps. These are financial contracts that allow you to lock in a specific exchange rate or price for a future transaction, or to exchange one currency for another at a predetermined rate or date. By using hedging instruments, you can reduce your exposure to currency risk and secure your profit margin.

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Robert Elman

Portfolio Manager, Director Wealth Management at Scotia Wealth Management
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In my experience it works because it’s simple, clear and quick. The process can be tested and verified and rejigged Good Luck

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Marcio Uemura

FX Sales Specialist na 360T
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In emerging markets choosing a stable currency is not always possible given regulatory restrictions in the market the company operates. If the company can't pass along FX price fluctuation in its products/services prices, then hedging financial instruments can be a useful tool to have better predictability. These instruments are negotiated with banks and are mainly subject to interest rates differential between currencies, term and credit relationship. Also consider using a multi-bank trading system that allows you to get the best price between your relationship banks. This market can have a wider spread between institutions, so best execution can be key to improve financial performance of such operation.

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4 4. Diversify your sourcing and markets

A fourth way to minimize the impact of currency fluctuations is to diversify your sourcing and markets. This means that you source your inputs from different countries or regions that have different currencies and economic conditions, and that you sell your products or services to different markets that have different demand and price levels. By diversifying your sourcing and markets, you can reduce your dependence on a single currency or market and balance out the effects of currency fluctuations.

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5 5. Optimize your inventory and cash flow

A fifth way to minimize the impact of currency fluctuations is to optimize your inventory and cash flow. This means that you manage your inventory levels and ordering cycles to avoid overstocking or understocking , and that you manage your cash flow to avoid liquidity problems or currency losses. By optimizing your inventory and cash flow, you can improve your operational efficiency and flexibility, and reduce your exposure to currency risk.

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6 6. Monitor the currency market

A sixth way to minimize the impact of currency fluctuations is to monitor the currency market. This means that you keep track of the exchange rates, trends, forecasts, and events that affect the value of the currencies that you deal with. By monitoring the currency market, you can anticipate and react to currency movements, and adjust your strategies accordingly.

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Marcio Uemura

FX Sales Specialist na 360T
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Monitoring markets can also be a key factor to make better decisions and avoid major losses due to price fluctuation. Being well informed is a must for any strategic decision. Corporates have seem big losses due to volatility even in stable currencies, which made them revaluate hedging policies, and this is only possible if the treasury/finance department is equipped with the appropriate tools to assess financial markets and the risks that price trends/changes may impose in the financial results.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you minimize the impact of currency fluctuations on your supply chain?

1

2

3

4

5

6

7

1 1. Choose a stable currency

2 2. Negotiate contract terms

3 3. Use hedging instruments

4 4. Diversify your sourcing and markets

5 5. Optimize your inventory and cash flow

6 6. Monitor the currency market

7 Here’s what else to consider

Import/Export Operations

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How can you minimize the impact of currency fluctuations on your supply chain?

1

2

3

4

5

6

7

1 1. Choose a stable currency

2 2. Negotiate contract terms

3 3. Use hedging instruments

4 4. Diversify your sourcing and markets

5 5. Optimize your inventory and cash flow

6 6. Monitor the currency market

7 Here’s what else to consider

Import/Export Operations

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