Managing Currencies in a Volatile Market – How Can You Manage the Risk?
With Foreign Exchange markets in a period of fluctuation, businesses need to employ a clear strategy on how to manage their own currencies. James Nicholson-Smith, from www.thefdcentre.co.uk discusses three methods to help minimise the risk of currency fluctuations impacting your business:
1. Forward Contracts
When a price is agreed with a supplier/client, the most effective way of protecting it is to buy a “Forward Contract”. This involves fixing a rate of exchange for a future date or period (e.g. a 30 day period to cover unexpected early/late payment). There should be no charge for this service and you gain peace of mind that your margin is protected.
Many companies employ a strategy of buying a portion of their requirement “forward” (which protects you in a falling market) and the remainder at “spot” (buying funds near the final invoice date – advantageous in a rising market) to achieve a balanced outcome.
2. Net Your Incoming/Outgoing Currency Flows
If your business activity involves both paying and receiving currencies, it may be worth holding foreign funds in currency bank accounts to protect against one of them depreciating. Of course it may be difficult to predict, or inconvenient to tie up cash-flow, but examining your trading history and expected near-term liabilities may help you decide, for example, that you should retain receipts in Euros for future use. You can then assess, when negotiating and executing purchases in Euros, whether it is more beneficial to buy them at the time or use your reserves.
3. Use a Currency Specialist
Since SMEs are not on their bank’s “top ten list” they rarely receive consultation on the FX market or international payment/receipt mechanisms. Since for some, exposure to currency fluctuations can be significant as a proportion of business activity, finding a specialist to assist can make all the difference.
Today more than ever it is important to gain as much control as possible over the risks posed by currency fluctuations. Whilst ten years ago a 1% move during the day would be significant, lately moves of 3-5% over the same period are not uncommon! The current uncertain economic outlook will likely prolong this volatility, so increasingly it is prudent to examine what you can be doing to protect yourself.
Having someone who understands your commercial requirements and who can not only advise on risk management but also help you time your currency conversions to take advantage of favourable conditions, can mean thousands of pounds on your bottom line, and will leave you free to run your business.
Several specialists offer this type of consultative approach when you transact with them, free of charge. One good example is Associated Foreign Exchange (AFEX) represented by Nick Tubb 0207 811 6515. The exchange rates offered are generally more competitive than UK mainland banks.
Further valuable advice on finding the correct foreign exchange strategy can be gained from the FD Centre, the largest provider of part-time FDs in the UK. The FD Centre is dedicated to helping businesses overcome problems and meet their strategic objectives. Visit www.thefdcentre.co.uk for more information or to contact for an informal discussion on your business requirements.