The importance of managing your foreign exchange exposure to maximise profits

Companies that work with a foreign supplier or who conduct business internationally require the use of a foreign exchange specialist: here Richard de Meo provides his top tips for successfully navigating volatility in the currency markets.

Trust your provider

Increasingly, UK businesses have looked for an improvement on the ‘retail’ pricing delivered as standard by their banking providers and have sought specialist advice to support them in understanding and managing their currency exposure.

In assessing possible currency providers, conversations too often centre on price, which is important, but pales in comparison to ensuring that the right trades are being booked or that a company is entering the market at the right time.

Rival providers can be drawn in to battling it out over a difference in price of as little as 0.0005 per cent ; invariably this proves a ‘red herring’ as introductory pricing deployed to win new business soon becomes more opportunistic and uncompetitive.

>See also: Forecasting fluctuations in foreign exchange markets

The priority should be finding a provider than can understand the business and support the company in acting with confidence – both in their dealings with international customers/suppliers and in the FX markets.

Our belief is that the price applied to FX transactions (so the difference between the inter-bank market rate and the rate offered to a client) has to be fair and transparent, but sustainable for both parties and assessed on a value-for-money basis.

We encourage our customers to focus on their core business, which is where their expertise sits, and to allow us to support them with our expertise of the currency markets.

For this to work, we recognise there has to be a relationship of trust where an FX provider is seen us an extension of the company’s finance function because we act in their best interests.

Understand your currency exposure

For a growing company that has a significant international element to its business, it is rare for currency exposure to properly be managed by simply allowing cash flow to dictate when international payments are made or foreign profits are repatriated.

Invariably there is some level of pricing commitment, whether to customers or suppliers. For a company buying or selling abroad, any such commitment has an in-built currency costing rate that puts the company’s gross profit at risk if corresponding FX deals are not booked.

>Related: How will you react to changes in foreign currency markets?

A key discussion is to understand contractual commitments, payment terms, timing uncertainty and the level of visibility over incoming or outgoing amounts; armed with this information, a simple strategy can quickly be found to ensure the profit margins are protected from adverse currency fluctuations.

The post-crisis environment has brought a more upbeat economic landscape but has not seen a drop in volatility or uncertainty across the currency markets. Failing to understand a company’s exposure to the FX markets and failing to act so often undermines effective management elsewhere in the company.

Keep it simple

Our belief is that the complexity of an FX strategy should not come from using complex financial instruments to manage a company’s currency exposure. The FX markets are sufficiently volatile and complex without the need for complicated hedging tools.

Having taken the time to understand a company’s exposure to the currency markets – including all underlying pricing commitments – a disciplined policy using simple tools is the approach universally deployed by the world’s largest corporate companies.

Further reading: Countries with the highest income tax

Praseeda Nair

Kellen Rempel

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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