Editors' Note: This is the third in a series of articles which was originally published in our whitepaper entitled, "The HiFX Guide to Managing Currency Risk. The first chapter in this series can be found here.
Many of our business customers aren’t aware of the full range of foreign exchange risk management options. They may think, for example, that any strategy other than buying the required currencies at today’s rates – the spot price – is getting into the realm of currency market speculation.
Hedging, in particular, is widely misunderstood – and therefore rejected. The idea of currency hedging is not to second-guess how foreign exchange markets might move in the days and weeks ahead. Rather, the aim is to insure the business against the possibility of adverse movements.
There are a variety of foreign exchange tools you can use to do exactly that, but consider forward contracts as one example. With these transactions, you’re simply arranging to buy a certain amount of currency at a set price in the future.
So, for example, a automotive manufacturer might be due to pay a €1,000,000 purchase to overseas parts suppliers in a month’s time. A forward contract specifying today what it will pay in sterling for that €1,00,000 eliminates the risk that the pound falls in value over the next few weeks so that the grocer has to pay more than expected.
This isn’t currency speculation or an attempt to second-guess the markets – it’s like an insurance policy.
It may be, of course, that hedging proves to be unnecessary. In our example, if sterling doesn’t fall against the euro, or when it rises, the grocer might feel it was a mistake to lock into a set rate in advance. But that would be to fall back into a mindset of seeing hedging as speculation rather than like an insurance policy. You don’t, usually, regret paying home insurance premiums when you get to the end of the year without your house having burned down.
This is not to suggest that hedging is the right strategy for all businesses – some may take the view that the size of their currency exposure doesn’t require this sort of insurance. Even so, don’t assume that a foreign exchange and business money transfer services provider can’t do more to help your business with its currency needs.
Don't Get Overwhelmed by Complex Administration
For businesses with regular foreign exchange needs, it’s all too easy for the daily detail of handling payments and other transactions to obscure the bigger picture. You may be so busy processing foreign exchange rates that you don't take a more strategic view of the business’s overall risk exposure.
Your problem may be that such transactions are taking up time that would be more productively spent on other issues. It may be that manual data entry processes are vulnerable to human error, causing you unnecessary delays.
This is often a particular issue for growing SMEs, where the business owner or founder naturally wants to continue to monitor overseas payments carefully but no longer has time to deal with the mounting administrative burden. They need to retain responsibility for authorising payments – particularly for larger sums – but they don’t have time to do all of the processing.
If you don’t have access to these sort of services, managing foreign exchange rapidly becomes a time-consuming and expensive task for your business. It therefore becomes even more difficult to take a strategic view of your activities in order to manage risk, enable proactive decision-making and plan ahead. Larger organisations can be especially vulnerable to this mistake.
Your currency exchange provider should be able to help you solve this problem. For example, it should be able to create a system that grants some users administrator rights – to do the processing work – while reserving payment authority for specific individuals. Look for a provider which offers straight-forward processing that is secure and reliable. They should help you trace delayed payments as required.
However, businesses that have never looked beyond their current provider for foreign exchange, or shopped around for an alternative partner, may not even be aware that there are other options. If you’re getting bogged down in the detail of currency transactions, talk to a trusted authority in international currencies like XE about how they might help you minimize risk and increase your return on foreign currency investment.
In the next article in this series, we'll explore the potential outcome of working with a ForEx services provider that does not adhere to regulatory compliance standards. After that, we quickly discuss the benefits of consulting with a trusted foreign currency exchange advisor.
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