ARTICLE

Business Finance Management Response to COVID-19

 As the uncertainties and risks peak in global markets by the effect of  COVID-19 corona pandemic, the concerns in the 'Futures Market' and derivatives are affirmed.To avoid the ‘exchange risks’ and ‘losses’ in financial statements and cash flows  caused by market fluctations, ‘Hedging’ methods and transactions are applied .

The Pandemic changes all the balances globally;  starting from the Far East jumping to Europe then US and covering the whole world respectively.The emerging market currencies like Turkish Lira, are highly effected by the prompt rises and falls. Negative rate changes in Turkish Lira are reflected to financial statements. In such circumstances, by hedging companies can eliminate their risks, bring a limit or they may stabilize their profits by the help of a qualified consultant or companies.

Hedging, is a risk management strategy that reduces or eliminates the risk of uncertainty by using the tools in financial markets effectively and efficiently and stabilizing the value of money or investment by a certain period.

  • Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Hedging transactions can be realized not only by exchange but can also be used for commodities, interests and stocks.
  • Derivatives, on the other hand, are risk-reducing futures contracts designed for the purpose of buying or selling any commodity or financial instrument from now on for delivery or cash settlement.

The main risks that push companies to use derivative products such as forward, futures, options or swaps are;

  • Exchange rate movements
  • Interest rate fluctuations
  • Volatility
  • Changes in loans and sectors
  • Liquidity risk

Firms that want to reduce their risks based on the primary commodity market can continue their transactions in secondary, tertiary, etc. markets using various hedging transactions and techniques in the Forex market.

Hedging transactions are carried out in the Forex market. Foreign Exchange (Forex or FX) is a financial market that offers the opportunity to make transactions worldwide, decentralized, and where the currencies of the countries' currencies are bought and sold, and may contain leverage.

Forex's primary purpose is to facilitate international investment and trade by enabling one currency to be converted to another currency. Central banks, institutional investors, currency speculators and small investors are among those trading in the Forex market.

The Importance of Good Financial Management

Exchange rate changes affect all activities of businesses such as their assets, resources, income and expenses. Even a company with low production costs, wide market, and high performance will suffer of losses in the absence of a proper and technical financial management hence the business continuity is endangered. 
Businesses that are managed with proper budget and cash management and taking cautions to reduce the effects of currency fluctuations save time in making decisions and are able to make long-term plannings.

Businesses that can manage their foreign exchange risk well, and cash flow well, gain an advantage in competition and have the opportunity to meet their obligations in time ; being protected from losses.  Especially, companies dealing with import and export can increase their credibility by reducing the exchange rate risk, thereby ensuring low-cost borrowings.

Uncertainties of  companies that import , export or borrow in foreign currencies can be eliminated today instead of experiencing loss on due date by reducing exchange rate risk through forward transactions.

Good financial management avoids money from melting away with exchange rate differences since it is earned with great difficulties .

What are the Steps of Protection from Financial Risk?

It is possible to determine financial risk by 'Corporate Risk Management'.

As we define the risks in monetary terms and put aside the general picture that comes up, first thing to do is ,evaluate all the items that make up the budget and cash flow statement in terms of foreign currency, maturity, interest, and penal sanctions.
It is very important to keep the cash flow statement and the fund flow statement intact and to follow the domestic and foreign markets closely.

Today, audits and controls are easier with various MIS tools, artificial intelligence, robotics etc.

Hedging transactions targeting to the reduce risks must be executed by getting support from experts or organizations.
It is important to share the cash flow forecast with the consultant and confirm the suitability of selected hedging methodology to the risk appetite and company structure.

Some of the debts and receivables can be hedged instead of paying attention to the maturity.

The most frequently used method in Exchange Rate Risk Management is “Forward Transactions”.

Forward transactions are contracts that regulates the purchase or sale of currencies against another over a predetermined maturity and exchange rate. It is made by executing the sale transaction at a future date from the price agreed on today by an agreement between the buyer and the seller.

PARTNER, CORPORATE FINANCE ADVISORY
Gülcan Keskin Fox Contact