Currency values can fluctuate significantly due to various factors. Political, economic and financial indicators and announcements are the most common which, in turn, can heavily impact one currency against another. 

Another important factor that has been prevalent in the last year or so is, of course, interest rate movements of a particular currency. This can affect values significantly bearing in mind the return gained on a currency with a higher interest rate. 

Currency risk in the international marketplace

Businesses spend a lot of time and effort entering the international marketplace so if you are either making outward payments as an importer or receiving foreign funds as an exporter, it is imperative that you evaluate at what point within your supply chain are you exposed to currency risk. There is no point whatsoever in setting up overseas supply chains and not keeping an eye on the potential risk. Businesses are not set up to lose money but by not hedging, there is a good chance you will.

Currency fluctuations can also introduce uncertainty into cash flows. Currency hedging allows companies to stabilise their cash flows by fixing exchange rates for future transactions, thereby providing greater predictability and reducing the risk of unexpected currency values.

Benefits of a forward contract

A forward contract is the mechanism which allows businesses to buy or sell a set amount of currency, based on the live market rate at that time, for a particular date in the future. In short, you can secure a rate today in readiness for a transfer or exchange in the future knowing exactly what the exchange rate will be. 

These contracts can also be used as a form of funding based on reserving an amount of purchased currency but, of course, not having to pay for it until the maturity date. The only outlay of funds would possibly be a securitisation deposit, if required, but this would be only a deposit, part payment of the contract. Please ask for more details.

These maturity dates can be fixed out to as much as 24 months in the future but generally, due to the markets being so volatile, it doesn’t always make too much sense in committing too far in the future. 

Currency accounts for exporters

If businesses deal with multiple currencies, it is particularly important to hold currency accounts in the different currencies you might have dealings with, especially being an exporter. You want to be able to have overseas funds sent directly to an account in your company name, for you to be able to decide when to exchange that money, or to use it to settle a forward contract, and not have it arrive at your bank in to one of their ‘slush accounts’ for them to exchange, normally into sterling, at whatever exchange rate they choose. This is the worst scenario for a company as their bank will make the exchange at the worst rate, sometimes at a cost of around 4% of the value of the incoming funds.

Virtual IBAN

What SWFX also offers is an account for you to pay direct foreign currency in to and to exchange it when you wish. This is done through what we call a ‘digital wallet’ which is basically a facility to manage and distribute funds in more than 38 currencies from one single account using a a virtual IBAN and SWIFT code, integrated directly into our foreign exchange services and global payments infrastructure. 

In our view, hedging and forward contracts really are an important factor while trading overseas and dealing with a raft of different currencies. Just buying and selling your currency on what is called the spot market can lead to losses and lack of profit. If deals are fixed at certain prices, i.e. exchange rates, then using forward contracts allows you to insure your profit rather than gamble it on the market hoping it goes in your favour. 

It doesn’t matter how good the spot price is, it will never beat the exchange rate of a well purchased forward contract if the market has subsequently moved against you. 

There are strategies for buying these contacts depending obviously how risk adverse you are. Please do make contact. We are here to help you. Please call on 01548 857009 or email  tim@swfx.co.uk.