If your business is involved in cross-border trade, then you will no doubt pay close attention to exchange rate fluctuations. If you convert thousands or even millions of pounds worth of currency then modest exchange rate movements, up or down, could spell triumph or disaster or for your bottom line.
You’ve worked hard. You’ve delivered your client’s order on time and on budget but the period it takes to fulfil a contract could mean weeks or even months pass by before payment is received. So, do you leave exchange rate movements to chance, hoping that all will even itself out over time, or would you prefer to be more in control of your company’s finances?
Dealing with exchange rate risk
If you know that you can make a profit on a sale at today’s exchange rates, then it makes sense to lock in this rate so that you do not leave yourself open to any unforeseen shocks in the financial system. Of course, exchange rates could also move in your favour, but is it wise to base your financial strategy on events that remain totally out of your control?
Jamie Holmes at foreign exchange broker CurrencyWave says: “Currency risk management should be central to any importer/exporter’s business strategy but all too often SMEs lack either the knowledge or access to facilities to deal with this and therefore leave themselves unnecessarily exposed. By simply fixing their exchange rates through Forward Currency Contracts they can alleviate this risk and protect profits within their business”.
Forward currency contracts
Forward currency contracts offer the ability to buy or sell an amount of currency fixed at today’s exchange rate for payment at some pre-determined future date. Let’s suppose a UK manufacturer agrees to supply component parts priced in Euros to an overseas customer but payment for the shipment is not due until 90 days. The manufacturer could choose to convert the sale at whatever exchange rate prevails at the time of payment, but this would leave them exposed to currency movements. The preferred option would be to sell the Euros on a forward contract at a fixed rate which is due to settle at the time the shipment is paid for.
No matter what happens to the prevailing exchange rate in the meantime, the manufacturer now has certainty over the amount of GBP to be received.
To hedge or not to hedge, that is the question
The use of forward currency contracts to remove currency risk is often referred to as a ‘hedge’ and is a common strategy employed by companies to stabilise their future foreign earnings. Such contracts can be viewed as a type of insurance policy, used to eliminate the uncertainties of exchange rate volatility and limiting their potential impact on company performance.
Forward currency contracts offered by CurrencyWave are a flexible tool designed to meet the dynamic requirements of small and medium sized businesses. Contract settlement dates can be extended to accommodate later than expected receipts or drawn down early, if required.
To find out more about forward currency contracts and how they can be used to reduce currency risk, call CurrencyWave on 0113 451 0180
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