Currency risk: Does this really affect me?
Because it often likes to lie low for long periods before suddenly taking its victim by surprise, the exchange rate risk spends most of its time relatively unnoticed, to such an extent that one might even be tempted to doubt its very existence.
• Exchange rate risk affects everyone, individuals and companies alike, even when all transactions seem to take place in the domestic currency.
• The example of a simple coffee on a terrace shows how many components (Brazilian coffee, Chinese cup, Australian sugar...) indirectly expose every consumer to fluctuations in multiple currencies.
• Understanding the real scale of this exposure, rather than denying it exists, is the first step to managing it better.
That said, whether you are an individual or a business, don’t forget: one way or another, you are inevitably exposed to currency risk. The real question, then, is not whether this financial risk affects you, but how significant it is, so you can act accordingly.
To make this currency risk as tangible as possible, we invite you today to sit down and talk about it over a cup of coffee.
Let’s talk about it over a good coffee
In theory, currency risk is defined as the probability of being negatively affected by a movement in exchange rates between currencies.
If you are an individual or a business whose transactions are all carried out in your domestic currency (Swiss francs, for example), you might assume that currency risk doesn’t concern you…
Think again! This financial risk concerns all of us. Not convinced? Here is a practical example showing how currency risk creeps into our daily lives without us even noticing.
Let’s say you decided to make the most of the sunny weather and the reopening of bars and restaurants by treating yourself to a coffee on a terrace, and, to mark the occasion, ordered your favourite espresso: a pure Arabica from Brazil with lightly roasted notes.
The price on the receipt left by the waiter is indeed shown in Swiss francs, but as you sit comfortably in front of your still-steaming cup, you set out to uncover the currency risk hidden behind this seemingly harmless order.
These skilfully roasted red and yellow Bourbon beans don’t come from the Swiss mountains but from inland Brazil. Well then, I’m exposed to fluctuations in the Brazilian real!
Struck by this first realisation, you follow your train of thought further.
This pretty china cup exposes me to fluctuations in the yuan, this little spoon made of Russian metal exposes me to fluctuations in the rouble, and these two lumps of Australian sugar to fluctuations in the Australian dollar…
Surprised, you look at your cup in a whole new light as your imagination takes off again.
After all, the coffee machine is almost certainly Italian, exposing me to fluctuations in the euro. And to ship all these components, international freight costs are surely denominated in dollars, exposing me in turn to fluctuations in the greenback…
Brazilian real, Chinese yuan, Russian rouble, Indian rupee, euro and US dollar… Never has a cup of coffee taken you on such a journey!
An ever-present risk
If a simple cup of coffee involves no fewer than 6 currencies, just imagine the long list of currencies that globalisation exposes us to today…
Of course, unless you are a heavy coffee drinker, these fluctuations (however unfavourable) won’t have much of an impact on your budget.
Nevertheless, whether it concerns your personal life or your business, a currency risk of some size lies behind most of our transactions today, and you should at the very least be aware of it.
Once you know your various currency exposures, you can consider taking the appropriate steps to reduce your currency risk where possible, whether through converting your currencies or by putting in place a currency risk reduction strategy.
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