Protecting profits and managing risk in 2019
2018 was meant to be a year of economic unrest. Tensions between China and the US have escalated to a trade war, marking the certain rise of global trade protectionism. This is further aggravated by the varied economic recovery of nations across the globe. The US Federal Reserve has consistently increased interest rates while plenty of nations still hold loose monetary policies to spur trade and investment. The consequence is an acceleration of global capital flows and increased financial market volatility, especially in the foreign exchange market.
A number of emerging markets experienced severe economic shocks this year, including Turkey and Argentina whose respective currencies dropped sharply. For example, the lira weakened to an all-time low in August. The precipitous drop triggered a flight of capital which subsequently maintained pressure on the lira.
The tensions between US and China have hurt import and export firms in many countries. Increased tariffs lead to fierce competition, foreign exchange volatility and inevitable trading losses as a result, especially if currency exposure is unhedged.
To provide a striking example, on November 4, China Eastern Airline released its third quarter 2018 earnings, and announced a foreign exchange loss of Rmb2.15 billion ($309 million). The major cause of the loss was the significant depreciation of the renminbi versus the US dollar in 2018. The net profit of China Eastern Airline was Rmb4.49 billion during that period and could have been 50% higher. In contrast, China Spring Airlines didn’t suffer an foreign exchange loss in 2018 having invested in US dollar assets to hedge against renminbi downside.
We expect the financial markets in 2019 to be volatile, especially foreign exchange – potentially more so than 2018. In these conditions, companies need to carefully consider how they manage their foreign exchange risk. Incorporating a treasury management system that can cater for this should be necessary for most enterprises who want to maintain profitability.
For companies with growing international trade and therefore more exposure to foreign exchange, a sophisticated global settlement network is the cornerstone for globalisation. Smart API technology is an important tool to support efficient settlement allowing an enterprise to connect operations with a financial service provider who can send through real-time foreign exchange data, and receives foreign exchange trades request back when required.
API can also be used to confirm completion of trades. On settlement day, enterprises can transfer the settlement information to a financial service provider via API after the settlement is completed. The use of API technology improves the settlement efficiency and saves on manpower cost. Also, it can reduce foreign exchange trade and settlement errors, inform enterprises of the latest exchange rates and prompt a fast response to the abnormal market fluctuations.
第二企业需要建立对于外汇风险的管理监控体系。企业的监管体系与模型需要包括real time limit control, forward cash flow control, counterparty risk monitor and control, stress testing, FX rate monitoring. 建立监控体系的目的是让企业能够非常清晰的了解外汇现金流，并且掌握这部分现金流所对应的潜在汇率风险，以及这部分的汇率风险对企业的盈利可能产生的负面影响，让企业的财务管理人员能够根据潜在的风险制定相应的避险策略。
Secondly, enterprises need to establish a risk management and monitoring system for foreign exchange risk. The system should include real time limit control, forward cash flow control, counterparty risk monitoring and control, stress testing, FX rate monitoring. This will allow enterprises better control over their cash flows and manage the exchange risk of these flows. Also, the exchange risks might have negative effect on the profit margin of the enterprises. The monitoring system should provide confidence for senior management to decide a corresponding hedging strategy to mitigate risks.
Thirdly, enterprises need professional teams to execute an approved hedging strategy. Choosing appropriate foreign exchange products to hedge will depend on the market environment and the key objective. If enterprises don’t have qualified teams to fulfil this requirement, professional foreign exchange service providers can help enterprises complete the design and execution of the hedging product.
The world’s economy faces high uncertainty in 2019. The intense trading atmosphere between nations is hard to change and financial market volatility will remain high. It is important for enterprises to prepare for the worst and protect their business.
詳細內容諮詢， 请跟我們的交易經理周先生聯繫，電話號碼：+852 3701 8180
For more information please call our Dealing manager Kane Chau at +852 3701 8180 or email email@example.com