Knowledge

What is FX hedging and how can it help your business?

investment

Does your company do any business in a foreign currency? Do you receive or make payments in anything other than British Pounds?

If so you could be leaving a lot of money on the table and you could be inadvertently exposing yourself to exchange rate fluctuations.


Improving your exchange rate

Often companies receive a significant amount of their income in another currency. Many of these companies just pay those Dollars, Euros or Yen directly into their British Pound account and let their bank do the currency exchange for them. This is without exception the most inefficient way to deal with foreign currency payments.

The ‘high street’ business bank rates are dreadful (trumped only by those departure lounge based FX exchange counters!)

Let’s look at an example:

Say you are receiving $50,000 from a US based customer.

At the time of writing this, a high street bank is quoting a rate for GBP/USD of 1.2761

Which means you will receive £39,181 for your $50,000

That’s excluding any transfer costs or additional charges you may incur. (and we know banks like to add charges for nothing…)

Now, using a different more competitive FX company you are offered a rate today for GBP/USD of 1.3048 meaning you’ll get £38,320.

That’s £861 more… for doing nothing except shopping around for the best rate possible.

Now imagine if your business was doing $500k per month in USD

That would be an extra £103,320 per year coming in….. very significant.

In fact, recently a client came to us who was receiving a lot of Amazon USD income into his sterling accounts. We looked into it for him and realised he was losing between £10,000 – £20,000 per year by just using an inefficient method to exchange that USD into GBP.

A simple change in strategy now means he locks in the very best rate and gets more income as a result.

 

Having a foreign currency account for income and expenditure

One other little trick for all businesses big and small is to open a USD denominated account (or other currency you regularly receive money in)

You then make all USD payments from clients or customers directly into that account.

If you happen to have any expenditure in USD you can make all those payments directly from that account. Saving you from exchanging that money twice. (USD to GBP then GBP to USD)

Then with any additional funds, you can transfer your USD into GBP when it suits you at a more competitive rate.

 

It’s worth pointing out here that getting the most competitive rate is subtly different to getting the best rate. Getting a competitive rate is exchanging your currency at the best rate based on the current interbank price.

Exchange rates fluctuate throughout the day and there’s a distinct difference between getting a ‘better’ rate because the rate has moved in your favour and get a better rate because you are using a competitive FX company.

You can’t control the exchange rate, but you can control how close to the true exchange rate you’re getting on your money. Closer to the interbank rate = more money for you

 

Exchange rate fluctuations and hedging

Exchange rates fluctuate, sometimes a lot, sometimes a little. It all depends on the current news flow, economic conditions, interest rate expectations and more….

As a company, you’re not in the business of speculating on the exchange rate. That’s where hedging comes in.

Hedging is simply ‘locking in’ an exchange rate now for a time in the future.

So, if for example, you know you’ll be receiving $50k each month for the next year, or you’ll be receiving a large payment in the future.

If you want to guarantee the exchange rate you’ll receive you can hedge this using certain financial instruments that we can help guide you with. These aren’t expensive and they are used by companies big and small throughout the world.

Locking in your rate with a hedging strategy means you won’t lose money if the exchange rate goes against you between now and the payment date. But it also means you won’t make any extra money if the rate moves in your favour. Useful for cash flow predictions.

 

Hedging can be used to both an expected future payment in a foreign currency or a receivable.

So if your business (large or small) does any transactions in a foreign currency then speak to us today.

Our experience means we can guide and assist you with the most efficient structures and strategies when dealing with a foreign currency.