Foreign exchange risks make speculators out of the most conservative managements.
Old and amply tested wisdom holds that unless a company’s business is primarily the trading of currencies or commodities, the firm inevitably will lose, and heavily, if it speculates in either. Yet foreign exchange risks make speculators out of the most conservative managements.
Executives will have to learn to protect their enterprises against several kinds of foreign exchange risks: losses on sales or purchases in foreign currencies, and loss of sales and market standing in both foreign and domestic markets. These risks cannot be eliminated. But they can be minimized or at least contained. Above all, they can be converted into a known, predictable, and controlled cost of doing business not too different from any other insurance premium by the use of hedging and options. “Internationalizing” the company’s finances is also the best—perhaps the only—way in which a purely domestic firm can protect itself to some degree against foreign competition based on currency rates.
ACTION POINT: Protect your business against foreign-exchange risk by hedging your exposure.
The Frontiers of Management
The New Realities
* Source: The Daily Drucker by Peter F. Drucker