There’s no shortage of foreign exchange risks when doing international business. From labor laws to taxes to inflation, economies are always changing, and that can impact your business during a global IT deployment. One specific kind of currency risk you may encounter is exchange rate fluctuation.
The exchange rate is something most people are familiar with, even if they don’t work with it directly. The value of a dollar in America is different from the value of a euro in Germany or a yen in Japan. These differences come into play when businesses work overseas and need to pay for or accept money for goods or services in a country that uses a different currency. The exchange rate tells you the value of one currency compared to another. For example, at the time of this writing, one American dollar is equivalent to about 104 yen.
Understanding Exchange Rates
If exchange rates were set in stone, then they wouldn’t be a source of foreign exchange risk during global IT deployments. Unfortunately, these rates change almost constantly. This is due to supply and demand, inflation in a particular country, and the general strength of the economy. These fluctuations are perfectly normal — but if they change too much, they can have a negative impact on your business.
Global IT deployments are often extended projects. You might be hiring local technicians to complete the actual work itself. If exchange rates fluctuate over the course of the project, you might end up needing to pay more than you initially thought, depending on how your contracts are written and how exchange rates fluctuate.
Mitigating Exchange Rate Fluctuation Risk
Because exchange rates are bound to change, there are a few things you can do to minimize the risk associated with your project. One way you can manage this risk is by conducting all of your business in the US dollar. If all of your invoices, contracts, expenses, and revenue are in your currency, the exchange rate won’t matter. However, many times the company you’re doing business with will add in some sort of risk fee since they’re taking on the risk of the exchange rate fluctuations.
Do your research. Before you can begin a deployment, you’ll need to do plenty of research around the potential risks of working in a certain country. Add exchange rate research to that list. By looking at the history of your target market, you can see what the trends are in exchange rate fluctuations for a certain currency. While there’s no guarantee that these trends will repeat themselves, this analysis can help you prepare.
You can also use a currency forward contract. If you choose this strategy, you’ll lock in the exchange rate of the day you sign the contract when you pay a deposit. These contracts can often last up to two years, and they can protect you from the risk of an increase in exchange rates.
However, there is a drawback to this approach. If the exchange rate changes in your favor, meaning you could pay considerably less down the road, you don’t get to take advantage of that change. You removed the risk of potentially paying more, so you don’t get the benefit of paying less. You’ll pay what was agreed to in your contract.
Work with a Partner
Juggling the uncertainties of exchange rate fluctuations can be a big job, and they can create added stress around your global IT deployment. Remove the unknown by working with a company that has years of experience in the international business space and is knowledgeable about foreign exchange risks.
Kinettix has worked with companies in over 90 countries to ensure their global IT deployments run smoothly. When working on a major international project, it helps to have someone with global expertise on your side.