Navigating the often turbulent waters of international trade is no easy task. Regulations, freighting issues, language and differences in business culture create just a few of the more testing barriers to trading success.
It’s vital for any company that embarks on international business to consider the impact of currency. As globalisation pushes the corporate world towards tighter margins in established markets, we realise that success or failure with currency can mean the difference between overall profit or loss on the bottom line.
With this in mind, here are our tips for maximising the effect and minimising the risks associated with foreign exchange.
Planning is key, place FX at the heart of your business strategy
Currency moves can easily wipe out your profit – or worse, place you in a loss making situation.
Careful planning and hedging of your company’s currency risk is vital if you want to avoid unwelcome costly surprises. Understand exactly where your exposure arises and take steps to eliminate risk through forward contracts or via other hedging methods where appropriate.
Get a feel for the market
Seek out information on the currency pairs that you’re involved in.
What are the key drivers of price action? Where has the pair traded? Looking at graphs and seeking advice should help you get an objective grasp of what kind of risks you are facing.
Minimise your time in free fall
Any company agreeing contract terms on the international stage can often find themselves committed to agreed rates before the contracts are formally signed.
Negotiations over contractual minutiae can be long drawn. You need to ensure that there is a contingency if the currency market moves against you between the point at which you agree any foreign exchange pricing in the contract and the signing of the overall agreement with your supplier.
Forget trying to hit the jackpot
Too often we see companies targeting rates which are unrealistic, or see specific directors locked in battle because of their opposing views.
Try and remember it’s unlikely that you will convert all of your currency at the best rate during a given period. By holding out for an unrealistic rate that you have in mind, you could end up with a far worse rate than if you take a measured approach to controlling your risk. Remember that you are running a business not a hedge fund.
Don’t be fooled by cheap or non-existent transaction charges and providers who promise the world
Anyone calling you and saying they can offer world-beating rates and no charges is either a high-risk broker or has nothing to offer you in terms of market knowledge or experience.
A good broker ultimately will charge a reasonable spread and in return you should demand good service. If you are going to squeeze every last penny out of your broker you aren’t going to be high up on their list of calls when the market moves in your favour.
Protection comes with a price
Hedging your currency risk normally carries a cost. You should think of it as insurance. Forward contracts can be costly if the market moves in your favour once you have traded. A good strategy should use a mix of products to mitigate your risk.
Ultimately, you should budget for the cost of removing the danger of adverse currency moves.
Educate yourself on the products available
Beyond standard forward contracts, the SME market now has increasing access to bespoke option products.
These may be appropriate for your business, take the time to understand the various ways in which you can protect yourself.
Mark Thompson is senior commercial dealer at Global Reach Partners.
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