As foreign exchange experts it is our responsibility to make foreign exchange transactions easy, quick and keep any associated costs as low as possible, because sending money abroad should not be expensive.
An integral part of our role is to also provide effective foreign exchange risk strategies for our clients. These may need to managed by various contracts and it is our job to offer clarity and add value by assisting each business to implement a strategy to mitigate exchange rate volatility.
Before we go into details of how to construct a foreign exchange strategy, it is important to define and fully understand what foreign exchange (FX) risk is.
For companies that are involved in sending international payments to various countries there is an element of risk due to foreign currency movements. So for example, companies that sell their goods and services overseas get paid in one currency. Foreign exchange risk is the potential loss they could make when converting the proceeds into their domestic currency after exchange rate movements.
For a business, doing nothing is not the answer. Managing risk makes sense and protects the company's bottom line. Hedging FX risk smoothes out the upturns and downturns and gives the company an element on control in what can be a very volatile market.
Minimises the impact of foreign exchange movements to your profit margin
Makes it easier to predict future cash flows
Provides better insight into pricing your products overseas
Removes the constant need to follow the market and predict best timing
Unfortunately, there are many importers and exporters particularly of small to medium size that do not have a foreign exchange risk management strategy in place. This is risky given the impact an adverse currency movement can have on profitability.
For example, let us say a UK importer is buying from a US supplier and the goods cost USD 300,000 and at the time of writing the exchange rate for sending money to the US is 1.3980, this means that the UK importer is expecting to pay USD 300,000/1.3980 = £214,592.27. The importer has not hedged any foreign exchange risk and is therefore exposed to currency fluctuations. By the time the company has to send US dollars the market has moved against him ie the pound has weakened to £1 = $1.2980.
This means that the importer now has to pay out USD 300,000/1.2980 = £231,124.80. The company in the UK is therefore having to pay £16,532.53 more than they would have done if they had hedged at 1.3980.
The Currency Club guides businesses of all sizes and operating in various sectors about how best to manage their currency exposure.
Generally speaking there are 6 defined areas that we work with on which provides us with clarity to create the right roadmap for your company to then implement and ultimately execute.
1. Understanding in detail the nature of the business and the sector it operates in
Every business is different and after discussions with each business and intensive fact finding our team of experts can drill down to the key areas that need to be addressed.
2. Confirming the FX exposure your business has with regards to sending money overseas, the frequency, the currencies and the related turnover amounts
This involves acknowledging the foreign exchange exposures the business is facing. If the company is an exporter, there will be the management of expected receipts in a foreign currency for the sales made. For an importing company, this will be the payments made out in foreign currency for the goods being bought.
3. Devising a bespoke FX risk management policy that will add value to your bottom line
Considerations involve the timings of making international payments or when receipts are due. Is there a specific time of the month? For companies that are importing, there is greater certainty as an invoice is generated based on agree terms with the supplier.
The other element is to do with net inflows in a particular currency. For example, a company that is expecting funds in may also be having to make payments out in the same foreign currency and in that instance the cash flows are offset and only the net amount must be hedged.
4. Formulating your hedging strategy
Once the FX exposures have been identified, a risk management policy alongside a hedging strategy is then proposed. The business is recommended to then be committed to executing the strategy. The risk management policy will incorporate the risk appetite, peers that operate within the same sector and whether the business is regularly sending money abroad, receiving funds from abroad or both.
The hedging strategy works within the risk management policy to ensure the business is successfully protected against any unexpected currency movements.
What is key, is that the business has complete access to accurate information this includes good visibility over expected cash flows, any existing hedging that may be in place and where the spot exchange rate currently is.
5. Diarising the best execution of the hedging strategy
This is the implementation of what has been discussed and confirmed in conjunction with the company's finance teams.
6. Constantly evaluating the strategy to ensure it is in line with the business goals and to adjust when required to any business changes.
Evaluating and measuring the results of the strategy is ongoing and adjustments may have to be made. In order to assess this, there needs to be a method to track the hedges that have been put in place and then quantify the benefits.
Following the basic steps discussed above and getting advice from an experienced and trusted foreign exchange broker will assist any sized business that is sending money abroad.
The Currency Club partners with various companies to assist them in making informed decisions, offering complete visibility over foreign exchange positions and offering an element of certainty when they are exposed to the uncertainty of currency markets.
To talk to our team of foreign exchange experts, call us on 0207 723 7000 or login at business page.
We have made every effort to ensure that the information published here is correct and accurate, however you should check and confirm the latest exchange rates with The Currency Club directly prior to making a decision. The information published is general and does not consider your personal objectives, financial situation or particular needs. Full disclaimer available