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 to access 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 from the UK’s decision to leave the European Union to the Swiss National Bank’s decision to de-peg the Swiss franc from the euro are driving a swell in currency volatility. In fact, sterling is currently 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 at the 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 volatility and 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 already covered 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 contract allows you to buy or sell an amount 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 time and knowing in advance what rate you’re able to access for transfers down the line.
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 or when the market hits your target rate, your broker will automatically trigger the transaction. Your targeted rate may be better than where the market is currently 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 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 vary in scope 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 approved by your board.
Contemplate currency options
Many businesses use 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 in combination. However an alternative option could lie in a 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 you achieve 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 creating a bespoke suite of hedging products to manage your risk.
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