A 2015 Censuswide survey showed 78% of internationally trading SMEs recognised that having a proper currency strategy could improve their firm’s profitability. As companies continue to look across borders to reach new customer bases, source cheaper raw materials and streamline supply chains, foreign exchange rates are becoming more and more important. Naturally, as this pattern continues, companies rely on budget rates, forecasted profit margins and assumed asset valuations that may in fact change as time goes on.
Recent shocks to the global economy including the UK’s decision to leave the European Union and the Swiss National Bank’s decision to de-peg the Swiss franc from the euro are prompting a surge in currency volatility. In fact, sterling is now 18% lower against USD than it was the day before the EU Referendum vote and 23% lower than one year ago, making it one of the worst performing currencies of 2016. And, with future risk events including the polarising US presidential election and the eventual invocation of Article 50 from the UK government, currency volatility has been and will continue to be at the forefront of financial directors’ and business owners’ thoughts.
With that in mind, there are a number of ways and methods in which you can help guard your business from the ill-effects of currency volatility and deal with uncertain exchange rates.
Stagger your transfers
Not sure if the current market rate might improve in the near future and not willing to trade your lot
today? Simply stagger your trades. If your business is looking to make a significant one-off transaction, break down that trade into two, or even three, separate transfers over an extended period of time. This way, should the rates improve, you’re able to lift the average rate at which your lump sum was traded. Should rates deteriorate, you’ve already covered a large portion of the trade at a better rate, allowing you to avoid exposing your entire transfer to the poorest market rate.
A forward contract allows you to buy or sell an amount of currency at or before a set time in the
future. It allows you to effectively pre-purchase your currency by paying a deposit ahead of time and knowing in advance what rate you’re able to use for future transfers.
The rate for a forward contract may differ from the spot rate as the market calculates a forward rate depending on the difference between the interest rates between the two currencies.
A firm order allows your company to target a specific exchange rate for the future. If and when
the market hits your target rate, your broker will automatically trigger the transaction. Your targeted rate could be better than where the market is trading, to try and catch the rate when it moves in your favour, or worse, to ensure you have a worst case rate. This way you can concentrate on running your business and leave watching the markets to your broker.
Establish a hedging strategy
If your company raises a proportion of your revenues or pays a proportion of your costs in a foreign currency that is significant to your business, in our opinion, you should have a solid risk management strategy in place. Strategies will vary in size and complexity according to the size and complexity of your business. The strategy should allow you trade both proactively and reactively with a pre-approved set of tools that have already been signed off with your board.
Consider currency options
Many businesses use a combination of spot contracts, where you accept a given exchange rate
‘on the spot’, and forward contracts, which allow you to fix a rate for up to three years. Alternatively,
the answer could lie in a made-to-measure currency option. You can discuss your hedging objectives with your broker who will be able to talk you through suitable products that could help you achieve those objectives. There are pros and cons whichever approach you choose and a good broker will explain everything before you decide.
We believe that any business exposed to currency markets should actively manage its risk – market movements can hit your margins or increase costs without warning.
Do you have a set of currency requirements that aren’t covered by spot and forward transactions? Speak to a World First FX specialist about creating a bespoke suite of hedging products to manage your risk.