As 47,000 UK-based businesses are nearing collapse at the end of 2024, many businesses are looking to forex trading as a way to enhance their investment strategy and hedge against the risk of global transactions.
Here are some ways businesses can use forex to their advantage.
Why do businesses use forex trading?
When doing international business or investing in foreign markets, businesses might encounter what’s known as currency risk. Currency risk is a type of financial risk that happens when businesses are trading in different currencies. Whenever a business has payables or receivables in different countries, they can lose money.
For example, if a UK-based company sells products to the US and the USD strengthens against the point, the UK company will get more money. This is known as a favourable currency risk.
Conversely, if the USD weakens against the pound, the UK company will get less money. This is an adverse currency risk.
What are the benefits of forex trading for businesses?
- Hedge against currency risk – With forex trading, businesses can hedge against movements in exchange rates and reduce the risk associated with international transactions.
- Facilitating international trade – Forex trading helps businesses convert currencies and thereby creates more opportunities for international trade.
- Access to liquidity – As the forex market is the most liquid in the world, it provides businesses opportunities to convert currency and execute transactions while keeping their prices low.
How to effectively manage currency risk?
Managing currency risk is essential if you’re going to maintain financial stability, especially during uncertain economic times in the UK. Some ways you can manage currency risk include utilising financial instruments with index trading, futures, options and swaps to fix the exchange rate for your transactions. This means you’ll eliminate the risk and uncertainty associated with your chosen currency pairs.
If you’re going down this route, you must deploy further risk management tactics such as stop-loss orders as forex trading is a risky trade and can backfire if you’re not careful.
Final thoughts…
As many UK businesses face potential collapse, trading is emerging as a strategic tool to help mitigate the risk associated with global transactions. By utilising forex trading, businesses can start to hedge against exchange rate fluctuations while continuing to trade internationally. By utilising instruments like index trading while ensuring adequate risk management strategies are in place, businesses can use forex trading to catapult towards success.
