Covid-19 has swept across the globe changing our lives and the way we conduct business
As a result, many companies are looking to review the costs of doing business and are keen to understand exactly what they can do to protect their organisation, staff and profitability moving forward.
Fluctuations in consumer demand, global supply chains, manufacturing output and economic outlooks have plunged the Foreign Exchange (FX) markets into challenging business terrain.
For example, the pound has experienced a huge range against the USD of nearly 25% since the start of the pandemic. The sharp fall in the initial aftermath has been matched by the quick recovery in the value of the pound since the start of 2021.
Everyone from eCommerce players to global corporations will have (at some point) had to consider how they ab- sorb the impact of exchange rate fluctuations on their profits.
One way to mitigate these risks is through hedging. Hedging allows businesses to take back control of their cur- rency exposures by removing the uncertainties caused by sudden and unexpected swings in currencies.
What are the business benefits of hedging?
- Limit your exposure to adverse currency moves
- Increase liquidity
- Greater business flexibility
- More accurate financial forecasting
- Grow your business
Even companies that already undertake some form of hedging will often bemoan their decisions of how and when to do this. Why didn’t we book more? Why didn’t we book less? Why did we book at all? Upon digging a little deeper there appear to be three common mistakes.
- Hedges are wrongly considered speculative instruments with a win or lose outcome depending upon if the position outperforms the spot market.
- The timing of when to transact often coincides with a perceived ‘good rate’ on offer, only for this to end up not being the case. A good rate today can be a bad rate tomorrow.
- The duration for which contracts are booked is often heavily weighted towards short-term requirements and longer-term exposures are ignored leaving businesses open to exchange rate
To successfully overcome these issues, a company should base their hedging decisions on accurate data, specific to themselves. A data-driven approach removes emotion and ensures consistency and accuracy when it comes to hedging. Formalising the process also allows for greater financial planning. Budget rates can then be stress-test- ed, future cash flows can be much more accurately forecast and ultimately risks can be identified ahead of time.
There is rarely one perfect rate, and every risk mitigation strategy must factor in the unique nuances of your business, people, industry, and needs. That involves more than leading tech and data. It involves a good old-fash- ioned conversation to completely understand your business.
Don’t Just Manage Your Currency Risk – Master It
Central FX offers currency risk management that is both relationship and data-driven for complete peace of mind. Whether you buy in other currencies, sell in other currencies, or make complex international payments – your dedicated FX specialist works with you to protect your business from violent currency moves and their unwelcome impact on profits.
We offer a full currency risk audit and a demonstration of Hedgemaster – our unique tool used by hundreds of Financial Directors to accurately manage and monitor currency risk.
Easy to use and informative, Hedgemaster is tailored to your business and needs with simple levers based on your risk appetite, growth rate and profitability. Enjoy notifications when it is time to take action as well as ongoing insights and reporting.
To have a chat about how we can protect your business from violent currency moves, get in touch with CentralFX.