Navigating Currency Management for Your Investment

Commonly-stated risk factors of investing in Latin America include the region’s capacity for political, economic, or social instability and related currency fluctuations. But Latin America is also one of the most attractive landscapes for investors, with a vibrant workforce and tourism scene, agricultural opportunities, and access to natural resources.

If you’re considering investing in Latin America, particularly in Colombia, these pros and cons are likely top of mind. In this guide, we’ll cover the basics of how investors can protect their businesses from economic fluctuations through a currency management plan.

What is currency management?

Currency management refers to processes that foreign investors or companies with international reach perform to avoid the negative economic consequences of currency fluctuations.

These investors or companies generally deal in several currencies, and a currency management strategy not only helps them mitigate the effects of the aforementioned fluctuations but also streamline their foreign currency exchange (forex) procedures. That is, a robust currency management strategy helps operations 1. Bolster their profitability, even amid unstable markets, and 2. Encourage easy, efficient transactions.

Common currency management methods

Head into a foreign investment with confidence by establishing a currency management plan from the outset of your operation. Here are a few common methodologies to include.

Meet the client’s needs

A solid currency management strategy contemplates streamlined payment and transfer solutions for foreign clients and suppliers—making the experience of doing business with your company more enjoyable.

For example, you can offer to buy and sell in the foreign client’s/supplier’s local currency, ensure that all payment instructions and documentation (like invoices) are in the preferred destination language (like Spanish), and offer a range of convenient payment options like transfers, credit card, third-party services (like PayPal, or Wise), and e-wallets.

Leverage price mark-up

There’s an economic plus for doing business in foreign currency: You can capture foreign-conversion price markup.

Foreign clients often assume that a product or service hailing from another country and quoted in a different currency will cost them a little bit more than the list price due to exchange rate fluctuations. So, they build in extra for this variable in their cost projections. For example, if you quote a product at $5,000 USD, a Colombian client may add a certain “cushion” percentage to this cost to cover a potential upward fluctuation in the exchange rate at the moment of purchase.

However, if you set a fixed price in that Colombian client’s local currency, they know exactly how much they’ll have to pay for your product without converting—and you can build a bit of markup into that pricing.

Hedge

Hedging implies locking in exchange rates as a form of “insurance” against potential fluctuations.

Forward contracts are a common hedging solution. A forward contract (or just “forward”) is a legal document that sets the future price rate of a currency, barring you from losing money on a rate that plummets.

Currency options are another solution. In this model, an investor has the option to buy or sell currency at a predetermined rate (known as a strike rate) by a certain date but is not obligated to do so either. If the strike rate is below the market rate at the contractual expiration date, the investor gains when transferring funds back into the original domestic currency at that low market rate. If the strike rate is above the market rate at the moment of expiry, then the investor can invoke the strike rate (instead of using the market rate) when transferring money back into the domestic currency, preventing a loss.

Another common tactic is a currency swap. In this model, two entities (like companies) swap their domestic currencies at a mutually-agreed-upon exchange rate instead of going through a financial institution (like a bank). For example, a US company might “loan” a Colombian company 2 million USD for an equivalent “loan” in Colombian Pesos. The entities later pay the swapped amounts back at the agreed-upon rate, with a determined amount of interest. Swaps can be beneficial for companies that wish to borrow money for foreign investment but want to avoid high interest rates at financial institutions.

Diversify

Diversification simply implies holding a variety of currencies.

Investors can get a multi-currency bank account, allowing them to hold various currencies at the same time. When the investor needs to, say, make a transaction in Colombian Pesos, they have this currency on hand—just as they might have US Dollars or Euros available for other transactions.

Manage cash-flow

Even with contemporary banking and payment methods, transactions between countries can be slow. International investors should build this consideration into their cash-flow strategy. That is, a company should always have enough liquidity to cover current operational needs—without relying on pending foreign payments that could take days (or even weeks) to arrive.

To further mitigate the uncertainty of transfer times, use reliable services, triple-check data (like the accuracy of account numbers and account holder names), and get tracking information.

Do the math

Prepare for foreign currency fluctuations by modeling potential outcomes. Use a foreign exchange rate and assets returns variance formula to estimate the risk of domestic currency loss.

Navigate uncertainty with confidence

Considering an investment in Latin America? Let the experts at LaGrande Global help you strategize a beneficial currency management plan.

The professionals at LaGrande Global can also advise you on performing comprehensive due diligence, including an in-depth financial analysis that can ensure the success of your investment.