Article:

How Companies Mitigate the Risks of Foreign Currency.

Let’s assume (like hundreds of thousands of UK businesses) that you are purchasing goods from abroad. You negotiate a contract with a Chinese factory to supply your product throughout the course of 2020.

The exchange rate is 1.30 US Dollars to 1-pound sterling at the time you broker the deal. Political unrest similar to what we have seen during Brexit causes volatility and the exchange rate moves to 1.20 US Dollars to every 1-pound sterling later in the year. You still need to purchase your products from the Chinese factory however it now costs you considerably more pounds to buy the same amount of US Dollars. This fluctuation eats directly into profit margins or can even see you trade at a loss. Over the course of a year, your formerly profitable arrangement can see potential losses run into the thousands.

FX Risk Management Strategies

Hedging risk is a vital part of your business strategy – allowing you to protect profits, produce more accurate financial planning and take advantage of movements within the currency markets. There will be core factors that are unique to your business when developing your risk mitigation strategy. Your business is more than just numbers. A specialist will take the time to understand the nuances of your organisation, industry and people. They will also possess up-to-date, in-depth knowledge of the currencies and countries you wish to trade in, as well as expert knowledge of the markets and products that can potentially save you thousands throughout the fiscal year.

Hidden fees, uncompetitive exchange rates, poor timing and execution can see a business lose large amounts of money. Accurately assessing your currency risk with a specialist is the first step towards appropriate risk management. With so many factors at play, the global FX market can feel daunting. If you are not properly protected you are taking unnecessary risks or worse, can be seen as gambling with company profits. There are a number of strategies and products that you can deploy and often a mixture is used to mitigate the risks of foreign currency:

A Spot Market allows you to purchase currency ‘on the spot’, take fast delivery of currency and full advantage of market movements.

Forward Contracts allow you to secure a currency rate that protects your profits a week, a month, 12 months or (in some cases) even further down the line.

Market Orders allow you to operate virtually 24-hours a day – much like the global FX markets. You can take advantage of market movements and execute orders as you sleep.

Whether you buy or sell in other currencies or would like to accurately understand your currency risk – we can help. The ‘best rate’ isn’t necessarily a fixed number, it involves finding out what is right for your company. As a service-led, data-driven business, we provide the insight to tailor the correct strategy that meets your unique needs. Increasingly, FX traders are deploying agile risk mitigation strategies that protect profits both now and in the future. Is your business one of them?

Central FX is a leading foreign exchange service protecting corporate and private clients since 2008. The benefits of overseas trade can be huge. We help you to get it right the first time and every time.

Get in touch with one of our dedicated FX specialists to assess your currency risk and find out how we can protect your bottom line.