We’ve nearly doubled our American sales over the past year but this is being impacted by exchange rates (dollars to pounds). What’s the best way to hedge to offset currency volatility?
Currency volatility caused by dislocations in global markets in recent years remains a big issue for many business, at home or abroad, and is of course an underlying risk in any longer-term international transaction. In theory, you would invoice your sales in sterling and remove the foreign exchange risk.
However, this is probably unrealistic as your customer or agent will be either taking the FX risk or have to engage in FX planning action. A more practical route could be agreeing a price with the customer in US Dollars (which gives an acceptable margin) with a forward contract to lock in an exchange rate. Forward rates can be different to spot, so take care.This solution isn’t overly complex and your clearing bank can most likely offer this facility. However, they might not necessarily offer the most competitive rate, so you?ll want to shop around. Of course, your negotiating ability will depend on the scale of your business.
If your business has a robust plan for the year ahead with export sales in US Dollars to many customers, then you could approach the issue on a total business level by taking account of monthly ?dollars in” and ?dollars out?. For instance, in my sector (biscuits) ingredients such as fats and oils are traded in US dollars, so this purchase volume can be deducted from sales to leave a net dollars-in position, which we can then hedge.
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