Learning FX

Why FX Risk Management Should Be Done with Software

fx risk management with software

The spreadsheet was the go-to software for many businesses in the early 90s and even 2000s. Of course, back then, this was revolutionising. However, technology has come a long way, and today, spreadsheets are now treated as prehistoric. Even then, so many companies still rely on spreadsheets to do things such as managing FX, but unfortunately, they're doing more harm to their business than good.

Are you still using a spreadsheet to manage your FX? Unless your exposure to FX is incredibly simple, relying solely on a spreadsheet for FX risk management can be an incredibly dangerous thing to do.

Signs You Are Relying on Spreadsheet Too Much

It's easy to use spreadsheets to manage your FX, and it's also easy to fall into the rhythm of doing so. However, there comes the point where it's becoming a liability to use spreadsheets for your FX. Here are some signs you might be relying on spreadsheets for FX too much.

1. You Don't Have a Good Understanding of Your Foreign Exchange Exposure

If you don't know what your current FX exposure is, how can you be expected to manage it? Any business with foreign exchange risks should know where the exposure stems from and how it will affect their business.

Spreadsheets don't help you discover this. The only way to really discover the source of foreign exchange exposure is by using a foreign exchange model. A foreign exchange model combats the problem of a spreadsheet by allowing you to understand your foreign exchange risk exposure better.

2. Spreadsheets Are Too Slow

Using spreadsheets to manage your foreign exchange risks is like driving an incredibly slow car. Sure, you can do it, but there are so many more annoyances, such as the fact that no one can catch on to you.

When spreadsheets are used for foreign exchange risk management, there is less room for error. If a mistake is made in the spreadsheet, it takes a long time to go back and fix it. Think about it this way: a spreadsheet would take hours to calculate the foreign exchange rate. On top of that, it would take hours to go back and fix it if there is a mistake.

That's time that could have been used to calculate your foreign exchange risk with a foreign exchange model.

3. You're Missing Opportunities to Improve

If you're using a spreadsheet to manage your foreign exchange risks, what's stopping you from improving it or making it better? There are many ways to do this, but the first thing to remember is that the foreign exchange model is more flexible. With a model, you can change risk parameters, such as the correlation between exchange rate and inflation, and you can change the weights of each risk parameter.

If a foreign exchange model is used, you can also use a risk-adjusted approach to managing your foreign exchange risk. This would allow you to better analyse your risk exposure, which means you can take a proactive approach to your foreign exchange risk management.

Spreadsheets are great for a lot of things, but they are simply too slow and too difficult to manipulate to calculate foreign exchange risks effectively. Try using a foreign exchange model, and you'll see how much better it is at calculating your FX risk.

The Downfalls of Using Spreadsheet

1. Wastes a Lot of Time

The spreadsheet is a very manual process. You have to constantly input the figures yourself, and this is a huge time-waster.

As you have to constantly check your data, be sure that you're not going to make any mistakes, you have to do it consistently, and on top of that, you also have to be very cautious with your updates. If you're not, then you might end up with inaccurate figures, and this can potentially cause you some losses.

However, with all the tools in today's date, we can actually get our risk exposure done in seconds. With automated calculations, you can now determine how much you're exposed to and how much you stand to lose if the rates change. See how you can build your own FX risk management in Excel with the help of our dedicated team of spreadsheets.

2. Spreadsheet Data Can Be Easily Manipulated

Do you dispute with your counterpart when they say that they're not going to pay as much fees as they said they would? Well, the chances are that they're probably right, and you are, in fact, wrong. This is because, even though you've clearly documented all your conversations, it's very easy to manipulate the spreadsheet data.

If you're copying and pasting, you might easily miss out on a few extra zeros on your figures. However, as you've already put in a lot of time, you probably won't want to waste your time checking the whole data again. So you'll just press on.

However, if you're using advanced tools, you can get all the data that you need, and you can trust the tools to do their job properly.

3. Spreadsheets Aren't Designed to Answer the Big Questions

Not only does a spreadsheet take too long to do its job, but it also doesn't have the capacity to answer tough questions. If you do not know what we mean, try and ask yourself the following questions:

"How big is my potential loss?"

"When will I have to make an FX payment?"

"What's my net FX exposure at the end of the month?"

"How much will I lose over the next few months?"

These questions are incredibly tough to answer through a spreadsheet, if not impossible. However, these questions are a must-answer, as they will help you manage your FX risks tremendously.

4. You Might Forget to Update the Spreadsheet

Regularly updating the spreadsheet can easily go wrong. It's very easy for you to forget to update the spreadsheet after a hard day's work. And if you've gotten home late, you probably won't want to do it.

Again, spreadsheets are way too manual. If you don't do it every day, it's easy to forget. And when you do it every day, you might easily make a mistake. That's why, while most traders are very familiar with basic financial tools such as spreadsheets, they often prefer to use advanced tools today.

5. Spreadsheets Are Not Updated Quickly Enough

Even if you do remember to update your spreadsheet, it might not be enough. For instance, you might have to make an FX payment tomorrow, but if you don't update your spreadsheet daily, you might not know this. If your spreadsheet isn't updated daily, you might easily miss a lot of important data.

If you're using automated tools, this won't be a problem. Every time you make a transaction, the tool will update itself automatically. And if you're running a business, this is a very important thing to do.

6. FX Risk Managers Have No-one to Hold Them Accountable

Once you have a set of spreadsheets for your FX risk management, you might get stuck in a rut. This is because there's no one to hold you accountable for everything, and you might just go for your everyday tasks.

You might not be making adjustments to your risk exposure, and you might be putting your business in a lot of danger. But this won't affect you as you're using spreadsheets, and you're probably the only one who's using the spreadsheets.

7. Spreadsheets Require the Entire FX Team to Collect and Analyse the Data

Are you the only one who's responsible for your company's FX exposure? If so, you better get that spreadsheet out and spend hours analysing it. Of course, this is not a very efficient way of managing your risk exposure.

If this is your situation, you might also want to consider automating your FX risk management. With the help of automated tools, you can now collect all your data in one place, and you can have an in-depth analysis of the situation.

8. Spreadsheets Can't Help You Find Opportunities

If you're an FX trader, you can get a lot of opportunities to trade on the FX market. But if you're using spreadsheets, you won't be able to find them.

Spreadsheets are made for basic data collection and analysis. They're very good at doing this, but if you want something more from your FX management, spreadsheets will be of no use to you.

If you aren't sure what advanced tools you should use to replace your spreadsheets, you might want to talk to our team. We can help you out with that. Or you can check out our FX risk management tool.

9. You End Up Doing the Same Data Collection and Analysis Over and Over Again

Have you ever wondered why you always get into the same situation again and again? You'll probably figure out that it's because you didn't stop to analyse what's wrong with your data.

Perhaps you forgot to update something, or you put in the wrong data. Whatever it is, if you're using spreadsheets and you're not doing the right analysis, you'll end up in the same situation again.

Using spreadsheets, you will always be stuck in the same situation because you're not doing the right analytics.

10. Spreadsheets are Not the Best Way to Communicate

Do you communicate with your counterpart frequently? If so, spreadsheets might not be the best way to communicate.

You might find that you need to communicate a lot with your counterpart, and it might feel really awkward if you're using spreadsheets.

With the help of spreadsheets, you might not be able to communicate with them, and you might need to rush to put all the figures into their own spreadsheets or collect the figures from their spreadsheets.

11. Spreadsheets are Not Designed for On-the-Go

If you need to get data when you're on the go, spreadsheets are a great option. However, if you're constantly on the go and you have to update your data, spreadsheets are not a good option.

Many spreadsheets are simply not designed for on-the-go data input. So you might be forcing yourself to do it. And if you're in a rush, you might make mistakes.

Of course, automated tools are designed to make your life easier, and they're very easy to use.

12. Spreadsheets Can't Handle a Large Volume of Data

Sometimes, spreadsheets are great because they can handle a large volume of data, and they can do it really quickly. You might want to store your data in spreadsheets, and you might find that spreadsheets are good at it.

But if you're looking to store huge amounts of data, you might need to reconsider. Because if you've got a large amount of data stored in the spreadsheets, they might hit the memory limits, and they might take a very long time to load.

Using spreadsheets can also be very hard if you have a large volume of data.

How to Move from Spreadsheet to Software

If you want to get out of the spreadsheet hell and start managing your FX risk more effectively, you might want to consider using advanced tools.

Advanced FX risk management tools will not only help you understand your risk exposure better, but you'll also be able to manage your FX risk more effectively and more quickly.

It's very easy to go from spreadsheets to advanced tools as they both offer you the same essential functions. You can use them to determine your risk exposure to your historical data, and you can use them to come up with all the right figures.

However, if you have a lot of data and you want to get a very detailed analysis of the situation, you might need an advanced tool. And with an advanced tool, you'll be able to get more out of the tool and manage your risk exposure much more effectively.

Conclusion

Spreadsheets are very intuitive and easy to use, but they're also very limiting. If you want to take your FX risk management to the next level, you might want to consider using advanced tools. With the help of advanced tools, you can get the most out of your analysis, and you can easily manage your risk exposure. You can always get in touch with our team if you want to know more.

Bound offers is an auto hedging platform built to help businesses protect their currencies. If you are looking for forex hedging, reach out to us today!

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