The foreign exchange market is the largest and fastest moving market in the world. It’s open for business 24 hours a day, five days a week and trying to navigate it can keep the most fearsome of Finance Directors awake at night. This year’s sterling performance against the euro and US dollar has been a particularly vivid nightmare.
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. Indeed, a recent survey suggested that 78% of UK internationally trading SMEs recognised that having a proper currency strategy could improve profitability*.
Our dealing teams have put together five simple tips can help you plot your way through the foreign exchange markets with confidence.
Know and protect your budget rate
Many SMEs use a budget rate to calculate costs on goods bought in other currencies and expected revenues on overseas sales. A budget rate is an essential planning tool as it is a constant used when forecasting. The rate is often set by using prevailing forward rates and should be achievable by entering into a hedging transaction.
Keep up to date
Currency markets can move quickly and suddenly in response to things like political events or significant international economic news. You could try and keep up with it all yourself but signing up to Jeremy Cook’s Morning Update is probably a lot easier and quicker.
Be clear on the price of your currency
The ‘spread’ is the difference between the price the broker pays for your currency and the price at which they then sell it on to you. Don’t be afraid to ask your broker to explain the spread, as well as any other fees, so that you know exactly how much your currency is costing you. And a word to the wise; some brokers use ‘honeymoon rates’ to win business and gradually increase the spread over time.
Make sure you consider your 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 which could give you the protection of a forward while also allowing you to benefit from the upside if the market moves in your favour. There are pros and cons whichever approach you choose and a good broker will explain everything before you decide.
Go to a currency specialist (hint hint)
Lots of businesses still default to their bank to make international payments when they would be very likely to save money by using a specialist broker instead – money that will directly affect your bottom line too. The point is this; you have options and a good broker will take the time to understand your needs and find the best way forward for you. That’s what we do at World First – there’s nothing ‘off-the-peg’ about either our solutions or our approach.
* 1,006 senior decision makers at UK SMEs with foreign exchange needs were interviewed between 30th November and 3rd December 2015 by Censuswide.
To find out more about how World First could help you manage your currency needs, give one of our friendly specialists a call today on 020 7326 9124 or visit worldfirst.com.