Sending money abroad is an integral part of any business trading in international markets. If a business has a foreign exchange hedging policy in place then the company may already have specific contracts to mitigate foreign exchange risk.
If you require an immediate international transfer, then spot contracts be used for impromptu payments. Equally, if you want to protect yourself against any adverse fluctuations in the currency markets, you might be better considering a forward contract. But if the main requirement is securing an exchange rate that is not available in the present foreign currency market, use a market order.
If your business does not need to send money abroad immediately, but is likely to have a requirement at some point in the medium or long-term, then market orders can be an extremely useful part of currency risk management tools.
In this brief write up, we will focus on two specific market orders: Stop loss orders and Limit orders , explain what are they and how can they be useful to businesses that need to send money overseas.
A stop loss order can be used when a company needs to protect cost levels against a negative rate move. Almost like an alert, a stop loss order is executed when a pre determined exchange rate is hit in a downward market to stop further losses.
This tool can provide businesses with the worst-case scenario when exposed to currency volatility and is a useful tool allowing profits to be protected if the market turns whilst still giving the option to participate when the market is moving in a positive direction.
Stop loss orders are sometimes used with a Limit Order to trap volatility and give clients greater control in extremely choppy markets. The sole purpose of a stop loss is to limit a company's losses on a foreign currency position.
Once the stop-loss exchange rate is hit it triggers a market order to buy or sell a pre specified currency and amount. This automation means businesses do not constantly have to monitor the market or worry about their currency positions.
The downside however, is that perhaps during a short-term fluctuation in a currency pair the stop loss can activate the stop price and the currency transaction is immediately executed. This may not be the desired outcome as it was a short blip.
A limit order can work well when the currency market is rising. This contract enables a business to set a specific exchange rate that is above current interbank exchange rate levels. Once this exchange rate is reached, an automatic purchase of currency takes place. Limit orders are particularly useful if a business knows it will need to make a payment in a foreign currency in the future, but is not bound by tight deadlines.
Additionally, it is worth using a limit order to try and achieve a better exchange rate (if the rates are moving in the company's favour) than the present spot exchange rate. Putting plans in place to take advantage of favourable currency movements can be a smart move for businesses with dealings in foreign currency markets.
Many businesses have a preference to place a Limit and Stop Loss order at the same time as part of their currency risk management strategy . To protect in favourable and unfavourable market conditions and if both are run together, then at the moment the limit order or stop loss order is triggered, then the other is automatically cancelled.
Assume Company A needs to exchange £1 million into US dollars at some point in the future. At the time of contacting one of our traders, the offered spot rate is $1.3800. After speaking with one of our team at The Currency Club, they decide to activate a limit order of $1.4000. However, knowing that they will need to exchange £1 million into US dollars regardless of the rate at some point in the future, they decide to bracket the limit order with a stop loss order of $1.3600.
Two months later, the $1.4000 rate is hit and their limit order is triggered. They exchange £1 million at $1.4000 and receive $1,400,000. This provides a gain of $20,000 against the rate it was when they activated the limit order and stop loss order (£1 million at $1.3800 = $1,380,000)
Using The Currency Club's global payments platform, businesses can enter these types of market orders, instructing a specific currency exchange rate in the future. Our team of foreign exchange experts will then ensure that when the specified exchange rate is hit, the business has secured it for the pre-agreed amount. Naturally, there no guarantee that the requested exchange rate will be hit, but if it is, The Currency Club provides best execution.
Market orders should be an integral part of any business that is involved in making international payments abroad. Get advice from an experienced and trusted foreign exchange broker that can offer guidance and clarity regardless of the size and frequency at which the business 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