How To Better Manage Your Currency Exposure

In today’s erratic financial climate companies need to take all the precautionary measures they can to ensure that deals they make do not break the bank when it comes time to actually paying for them some time down the line.

Clearly, a key part of that process is for a business to cost the project properly. And, if buying from or selling to a company abroad, it needs to make quite sure that it has costed in realistic currency exchange rates. It must also know how to manage the risk of those exchange rates moving against what has been budgeted.

Using a forward contract can be a powerful tool in hedging your exposure.

Since the beginning of 2009, the €/£ exchange rate has moved between €1.02/£1 and €1.22/£1. That is a difference of 20 per cent.

So, if you were importing or exporting goods with a euro value of €1,200,000, you could be looking at a sterling figure of either £1million or £1,200,000. Put simply, if you get it wrong, you could be looking at increased costs, or lost income, of £200,000.

So…which would you prefer? You could get it right and benefit by that amount or you could find yourself scrabbling around to find an extra £200,000.

It’s a no-brainer.

How do you make sure that you are not caught out by an exchange rate that goes against you? By taking out a forward contract is the answer.

What does a forward contract do? It secures an agreed amount of currency at an agreed exchange rate for an agreed date in the future, secured by a small deposit. And you don’t have to pay the balance of the full amount until that agreed date unless you so wish. And, if need be, you can extend the agreed date.

So, in this example: you may budget an exchange rate of €1.11/£1 so the expected cost/income was £1,081,081. And, if we assume we were buying goods from Europe and were able to secure a forward contract at say, €1.15/£1, then you would have reduced your cost to £1,043,478 – a saving of £37,603 which flows to your bottom line. Better than having to buy at an exchange rate of €1.02/£1 and face an additional cost of over £95,000 – probably turning a profitable contract into a loss!

For more information on Smart Currency Business call: 0845 638 0571 (or +44 (0)207 898 0541 from outside the UK) or visit our website at: SmartCurrencyBusiness.com