A 2015 Censuswide survey revealed 78 per cent of internationally trading SMEs recognised that”having a proper currency volatility strategy in place could improve their firm’s profitability. As companies continue to look across borders toAccess new customer bases, source cheaper raw?materials and streamline supply chains, foreignexchange 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 fromthe UK’s decision to leave the European Union?to the Swiss National Bank’s decision to de-pegthe Swiss franc from the euro are driving a’swell in currency volatility. In fact, sterling iscurrently 18 per cent lower against USD than it was the day before the Brexit vote and 23 per cent lower than one year ago, making it one of the worst performing currencies this year. And,?with future risk events including the landmark US?presidential election and the eventual invocation?of Article 50 from the UK government, currency?volatility has been and will likely continue to be atthe forefront of financial directors” and business?owners” minds.
With that in mind, here are a number of ways?you can help protect your?business from the ill-effects of currency volatilityAnd manage volatile exchange rates.
Stagger your transfers to protect against currency volatility
Not sure if the current market rate might improve in the near future and not willing to trade your lot now” Try staggering your trades. If your business?needs to make a significant one-off transaction,?break down that trade into two, or even three,individual transfers over a period of time. By doing this, should the rates improve, you’re able to?lift the average rate at which your lump sum was?traded. And, if rates deteriorate, you’ve alreadycovered a large portion of the trade at a better rate,Allowing you to avoid exposing your entire transfer?to the worst market rate.
Consider using forward contracts
A?forward contractAllows you to buy or sell anAmount of currency at or before a set time in the future. It enables you to effectively pre-purchase your currency by paying a deposit ahead of timeAnd knowing in advance what rate you’re able toAccess for transfers down the line.
The rate for a forward contract may differ fromthe 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 or when the market hits your target rate, your broker willAutomatically trigger the transaction. Your targeted rate may be better than where the market iscurrently trading, to try and catch the rate when it moves in?your favour, or worse, to ensure you have a worstcase rate. This way you can focus on running?your business and leave market monitoring to?your broker.
Adopt a hedging strategy
If your business raises a proportion of your?revenues or pays a proportion of your costs in a foreign currency that is significant to your company,in our opinion, you should have a clear risk?management strategy in place. Strategies will varyin scope and complexity according to the size and complexity of your business. The strategy shouldAllow you trade both proactively and reactively withA pre-approved set of tools that have already beenApproved by your board.
Contemplate currency options
Many businesses use spotcontracts, 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 in combination. However an alternative option could lie inA made-to-measure currency option. You can discuss your hedging?goals with your broker who will be able to talk?you through suitable products that could help youAchieve those objectives. There are positives and negatives whichever approach you decide on and a good broker?will explain everything clearly before you decide. Using monitoring tools like XE.Com that displays currencies from around the world in real time.
At World First, 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?creatingA bespoke suite of hedging products to manage your risk.