ADVICE
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ny business with foreign exchange requirements has to consider the impact exposure to the volatile currency market can have on their profitability. With exchange rates fluctuating by as much as 5% in a matter of days, the timing of your currency transfer can have a considerable impact on how much money you receive and make budgeting for both one-off and recurrent transactions more difficult. SO WHAT IS CURRENCY RISK? Simply put, currency risk occurs as a result of exchange rate variations, or changes in the value of one currency relative to another. Exchange rates can move in response to a wide range of economic, social, political and even environmental factors and when a rate shifts the amount your funds are worth shifts with it. If an exchange rate strengthens, you’ll get more of the currency you’re looking to purchase, but if an exchange rate weakens you run the risk of getting less than you would have done before the movement took place. 2015 has been a particularly explosive year for the foreign currency market, with several dramatic events demonstrating just how unpredictable exchange rate movements can be. In January the Swiss National Bank (SNB) removed its peg with the Euro and the Swiss Franc surged by as much as 25% against some of its rivals in the immediate aftermath. This historic shift was soon followed by a sharp decline in the value of the Euro, with the GBP/EUR exchange rate achieving a succession of over 7-year highs after the European Central Bank (ECB) rolled out its long-anticipated quantitative easing programme. Later in the year the Chinese stock market crash, dubbed ‘Black Monday’, sent commodity-driven currencies like the Australian Dollar reeling, with the GBP/AUD exchange rate jumping from 2.1132 to 2.2046 within the space of a week. To put this in real terms, if your business needed to exchange £20,000 to Australian Dollars in order to meet import costs, your funds would have been worth A$1,828 more at the stronger rate.
CAN YOU PRE-EMPT CURRENCY RISK? The events highlighted above were almost wholly unexpected, with the resultant market movement being all but impossible to pre-empt. However, there are steps your business can take to help limit your exposure and make budgeting for future foreign currency transfers more straightforward. STAY ON TOP OF MARKET MOVEMENTS While some market shifts can come out of nowhere, other fluctuations are gradual and keeping track of the latest currency trends can help you plan your transfers more effectively. As previously stated, a huge number of stimuli have an impact on exchange
While some market shifts can come out of nowhere, other ƭXFWXDWLRQV DUH gradual and keeping track of the latest currency trends rates and monitoring the latest economic data releases, political developments and social changes is a time consuming undertaking few business have the resources to cope with effectively. If you want to simplify how you stay informed you could sign up to a foreign currency transfer service which offers free market updates. With in-depth exchange rate analysis from industry experts to hand, your business will be better equipped to decide when and how to manage its foreign currency transfers. SEEK SOME EXPERT GUIDANCE Even with market updates keeping you in the loop, you might feel more insulated from currency risk if you talk through your transfer requirements with a professional. Reputable currency brokers employ currency and risk
management specialists who can help your business identify its exposure and decide how best to combat it. Some institutions will also assign you an Account Manager to oversee all of your business transfers and keep you abreast of any pertinent developments. CONSIDER THE TRANSFER OPTIONS You may find that the best way to limit your company’s exposure to currency risk is to adapt the mode in which you move funds abroad. If you typically use a spot contract, where currencies are exchanged ‘on the spot’, the exchange rate you’re able to secure will depend on the market conditions of the day - not ideal for forward planning. Implementing a forward contract, on the other hand, would allow you to fix a rate up to two years before you need to send or receive the currency. By fixing a rate in this way you know exactly how much your transfer will be worth no matter how much the market moves in the meantime, helping your business enjoy greater flexibility and security. Your business may also want to consider taking advantage of the benefits of either a Limit Order or Stop-Loss Order. With a Limit Order you can leave an instruction with your foreign currency provider to target a specific exchange rate. As soon as the target rate becomes available your trade will be executed automatically. A Stop Loss Order lets you control the level of risk your transfer is exposed to as you can set a minimum rate at which to make the exchange, with the transfer being conducted if the exchange rate deteriorates to the level specified. The main advantage of a Stop Loss Order is that you can lock in a worst-case rate while waiting for conditions to improve. The currency market is certainly unpredictable, but business international money transfers don’t need to be risky to manage. You can limit your company’s exposure to risk by taking a proactive approach to your currency exchange requirements and considering all the options available. Contact: www.torfx.com
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