Getting to Know the Animal of Your Corporate FX Risk

Over history, people developed systems for measuring time and keeping track of information. From cataloging the patterns in the night sky—like constellations—to creating educational anecdotes to pass on wisdom about life, love, or economics—like fables or parables—many of these metaphorical systems have featured animals. Like in Aesop’s fable “the Crow and the Pitcher,” when the bird puts pebbles in the pitcher, it raises the level of water until he can drink. The tale helps pass knowledge on about how to make steady progress working through problems. GPS approaches FX exposure analysis in the same methodical way.

As we enter the Year of the Dragon, we can look at the categories of FX exposure and ways to approach hedging them by comparing them to the Chinese zodiac. Are you approaching your balance sheet exposure with the patience of an ox or the cunning of a snake? Are you ready to channel the luck of the dragon to push your company forward this year?

Read through our list to learn more about knowing the animal of your corporate FX risk and taking inspiration from the positive qualities ascribed to it to respond to risks.

The Pig: Transaction Exposure

If the financial services industry had a mascot, a pig would be a great choice. With its long association with reliability, it’s no wonder kids learn to save using piggie banks. In the Chinese zodiac, people born in the year of the pig are good in business dealings. There’s even a story about a pig and chicken who want to start a business: The chicken says she will contribute her eggs and expects the pig to hand over the bacon. The pig in this story is the business partner with the most to lose and a life-and-death commitment to getting the business to succeed, whereas the chicken is a fair-weather partner who will likely cut and run when things get rough.

Transaction exposure is the day-to-day risk associated with invoices and contracts. A pig-like approach to foreign exchange is what we at GPS Capital Markets provides. Each of a client’s risks is assessed, documented, and hedging strategies put in place to save and optimize practices over time, day by day, invoice by invoice. With the reporting and analytics capabilities of FXpert, regularity and dependability in your FX trading and hedging strategies improves steadily.

The Rat: Translation Exposure

One of the main types of FX exposure is Translation Exposure or Exchange Rate Exposure. This exposure takes place when financial statements (balance sheet, profit and loss) must be translated from a subsidiary’s local currency into the parent company’s currency. The consolidation necessary to assess the company’s accounts reflects the ethos of the Chinese zodiac rat.

Rats, like squirrels and other rodents, scavenge, consolidate, and guard resources. Consolidation gives confidence to investors and board members. As the translation of funds occurs, it’s worth leaning into the positive aspects of the Chinese rat, being meticulous in accounting for exposure risk before it becomes a real problem on your balance sheet and putting plans into place to mitigate losses as a result. Learn more about hedging.

The Ox: Economic (or Operating) Exposure

Every seasoned business owner has faced years when nothing seems to go right. Even when your books are balanced and the leadership is making good decision after good decision, larger market forces have flattened strong companies and entire economies. Economic exposure is the risk inherent in fluctuating currency markets on a broader scale. In terms of macroeconomics, there’s still ways to predict and model these dynamics; however, one of the most important ways to brace for variability in markets is to take the ox as inspiration.

Oxen symbolize hard work. Whenever populations moved or tamed territory through history, oxen were present to pull carts and plows. To face wide exposure, you must be strong, independent, and supportive of the rest of your treasury team.

Even when a client has thousands of pending invoices, at GPS we move forward like a stubborn ox until the client has a clean shop and fully functioning accounting practices in place.

The Dragon: Mitigating Corporate FX Risk

In February 2024, we ushered in the year of the dragon. An ancient symbol of China and associated with luck, the dragon also symbolizes powerful, energetic, and visionary leaders. When it comes to an overarching metaphor for corporate leadership tackling exposure risk, there’s no better image than the dragon. When you consider expanding into new markets, business leaders need a good measure of courage and luck to set up subsidiaries and deal with exposure as it arises.

Another aspect of the dragon is that it’s a giver of abundance and longevity. At GPS, we provide the extra help treasury department and C Suite leaders need to grow their businesses across national boundaries and foster success far into the future. Because our individualized customer service is coupled with the leading FX rates and technology, we have long-term clients who trust us to help lead their companies forward with the spirit of the 2024 dragon.

Further reading about the Chinese zodiac: https://chinesenewyear.net/zodiac/

Further reading about corporate FX exposure: https://www.investopedia.com/terms/f/foreignexchangerisk.asp