Foreign exchange risk is something you need to consider and prepare for before you begin a global IT deployment. Anytime you do business in another country, you are subject to this type of risk. However, not all foreign exchange risk is the same, and there are a number of factors that can affect these currency fluctuations.
Before taking on a global IT deployment, educate yourself on these factors so you can be better prepared to combat foreign exchange risk.
5 Factors That Contribute to Foreign Exchange Risk
Inflation in the country you’re doing business with is sure to impact the exchange rate and can impact your return on investment (ROI). If the IT deployment is scheduled over several months to a year, the inflation rate can easily change during the project. Do your research before you begin the deployment, but continue to keep your finger on the pulse of the target market, so you know what’s happening and what’s to come.
2. Government Debt
Government debt can increase your global IT deployment’s foreign exchange risk. While going into debt often stimulates the local, domestic economy, it also causes inflation. This brings us back to the first factor in this list. High inflation can lower your ROI in the future, so if a country has a significant amount of public debt, it might be better to avoid doing business there.
A recession can also significantly impact foreign exchange risk. Recessions cause interest rates to fall. While this can benefit the domestic economy, it can also weaken the country’s currency, which in turn lowers the exchange rate for that currency. It can be hard to predict when this type of economic event will occur but watch for warning signs so you can be prepared to ride out the recession — if not avoid it entirely.
4. Interest Rates
Speaking of interest rates, they also have a direct impact on foreign exchange risk. Higher interest rates tend to attract foreign capital and bring in more international business, as they’re an indicator that the country’s economy is doing well. Increased interest rates also lead to higher exchange rates, which is better for international companies doing business there. Again, be aware of the interest rates in the countries you’ll be doing business with so you know what’s coming.
Investors will often try to speculate about the future of a country’s currency. If they anticipate the economy will do well and the value of the currency will rise, there will be greater demand for that currency. This demand leads to an increase in value and an increase in the exchange rate.
If you’re concerned about foreign exchange risk, it’s always a good idea to find a locked-in exchange rate service. This service can protect you from fluctuations in the exchange rate and help mitigate this risk. More than anything, though, staying up-to-date on the economic situation of the countries you’ll be doing business with is the best way to counter foreign exchange risk.
You don’t have to do it alone, though. Navigating this data and speculation can be difficult, especially if you’re new to this information. Instead, work with a company that has years of experience, like Kinettix.
We’ve helped countless companies do business in over 90 countries around the world. Partnering with Kinettix can help you make sense of these complex systems and navigate your international product with ease.
Planning and coordinating a global IT deployment is no small task. Remove the stress of foreign exchange risks by finding a global partner to help you understand and navigate the risks you’re bound to encounter.