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.
However, whether you are an individual or a business, don’t forget that you are inevitably exposed to currency risk in one way or another. The question, therefore, is not whether this financial risk applies to you, but rather how significant the risk is so that you can take appropriate action.
To make this currency risk as tangible as possible, we’d like to discuss it with you today over a quiet cup of coffee.
Let’s discuss it over a nice cup of coffee
From a theoretical point of view, currency risk is defined as the probability of being negatively affected by a change in exchange rates between currencies.
If you are an individual or a business whose transactions are all conducted in the domestic currency (in Swiss francs, for example), you might therefore think that currency risk does not apply to you…
Wrong! This financial risk affects us all. Doubt it? Here is a practical example to illustrate how currency risk creeps into our daily lives without us realising it.
Let’s say you’ve decided to make the most of the fine weather and the reopening of bars and restaurants by treating yourself to a coffee on a terrace, and that to mark the occasion, you’ve ordered your favourite espresso, a pure Brazilian Arabica with slightly roasted notes.
The price shown on the receipt left by the waiter is indeed in Swiss francs, but as you sit comfortably with your still-steaming cup, you start to wonder about the exchange rate risk involved in this seemingly innocuous order.
These expertly roasted red and yellow Bourbon beans don’t come from the Swiss mountains, but from the Brazilian hinterland. Well, it seems I’m exposed to fluctuations in the Brazilian real exchange rate!
Struck by this initial realisation, you begin to follow your train of thought.
This pretty Chinese porcelain cup exposes me to fluctuations in the yuan, this little Russian metal spoon exposes me to fluctuations in the rouble, and these two Australian sugar cubes to fluctuations in the Australian dollar…
Astonished, you look at your cup in a new light as your imagination kicks into overdrive.
After all, the coffee machine must surely be Italian and expose me to fluctuations in the euro. And to transport all these components, the international shipping costs must indeed be denominated in dollars and consequently expose me 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 six currencies, just imagine for a moment the long list of currencies to which globalisation exposes us today…
Of course, unless you’re a heavy coffee drinker, these fluctuations (however significant they may be) won’t have much of an impact on your budget.
Nevertheless, whether it concerns your personal life or your business, most of our transactions today involve a degree of currency risk, however small or large, and you should therefore at the very least be aware of this.
Once you are aware of your various currency exposures, you can then consider taking the appropriate steps to potentially reduce your currency risk, whether by converting your currencies or by implementing a currency risk mitigation strategy.
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