The Key Challenges (and Solutions) for Businesses Managing Currency Issues

Currency issues are overlooked by many businesses. After all, FX fluctuations are beyond your control.

Pain Points in Managing Your CurrencyAll true. But for a group understandably motivated by precision and profit, Financial Directors and business leaders can take simple steps to control exposure and protect margins.

Any business that has clients or staff overseas, buys and/or sells in other countries, or sends sums of money abroad will be subject to currency issues. Whilst expanding your operations into new countries and markets offers a wealth of diversity and opportunity, unfavourable or unexpected currency fluctuations can negate the profits which is far from ideal.

Much like modern crash avoidance systems on cars, technology and data now offer huge incentives for businesses keen to avoid expensive currency collisions.

So, what are the key business risks of your currency movements and how can you deftly avoid them?

1) Know your risk

Understanding the currency risks that can affect your business allows you the ability to plan, mitigate and protect. With numerous external factors impacting the direction of currency markets, it can be tempting to leave these risks unattended in the hope of a

beneficial outcome. However, businesses ignore these risks at their peril as adverse exchange rate movements can lead to sizeable and avoidable losses. With more tools and resources at your disposal than ever before, is it worth investigating further?

Four key factors lend themselves to a robust understanding of your risk: Timing – when do you need to exchange one currency for another? The amount – how much are you exchanging (even small FX movements can disproportionately impact profitability). Margin

  • what is your profit margin? And finally, forecasting – accuracy of your forecasting will support the appropriate management of your business’s currency issues and improve financial

2) The best rate

The best rate today may be a bad rate tomorrow. Fortunately, armed with the right knowledge, tools and tech, a moving target is not too hard to hit. The best rate is rarely one fixed number. For example, agreeing on a rate for a 12-month contract in America may be favourable initially but external factors such as Brexit, Covid-19 and political and economic events can wreak havoc further down the line. This is not uncommon. Variable external political and economic factors affect currency trades continually.

The best rate is about understanding what’s right for your business

  • including your people, industry, objectives, and risk appetite, as well as understanding what moves the market. Timing is essential when deciding how much to book and how long for. With a mixture of hedging solutions to choose from and technology on your side, you can (literally) trade in your sleep and secure the best rate based on your needs.

3) International payments service

FX is notoriously challenging to manage. The integrity of spreadsheets quickly declines, and they are difficult for finance teams to update. Understanding new exposures, updating transactions, sending international payments, multiple currencies, paperwork presentation, fees, and intermediaries – the margin for error is high. A service provider has the time, tech, and knowledge to manage your international payments as per your needs. They will also hold intuitive knowledge of the international payment’s framework. You may require a proactive service, a prompt reply on email, a dedicated account manager, or all the above. An expert can advise on what tools will help to protect your profits and allow for greater and more accurate financial planning. Last but not least, a secure online payments portal keeps the complex simple

– allowing you to get on with running your business. Integrated, live and accurate – a secure payments portal provides updated FX

positions, current FX cashflows, seamless integration to the liquidity provider of your choice, expert digital consultancy, integrated accounting, and reconciliations, and more. Businesses of all sizes are ditching the spreadsheets and understandably so.

4) Strategy

FX conversions are controllable expenses and not simply a business storm to weather. Managing your business’s currency risk affords peace of mind and ensures you have an appropriate currency hedging strategy in place. Hedging can strengthen your organisation and protect you from the sharp swings of currency fluctuation and quite simply help you do business for less. Your unique strategy is guided by your business and utilises in-depth knowledge of the external factors that move the markets. Business owners and financial controllers are responsible for financial health and there are concrete steps that can easily limit the impact of currency fluctuations that will impair the company’s performance. Spot transactions are an agreement between you and a second participant to buy and sell, respectively, at the current market value and to usually settle the transaction 1-3 days later. Forward contracts allow you to secure a fixed rate for the future and yield far greater control of your budget. There are plenty of hedging strategies for you to choose from that are purpose-built to reduce your risk.

5) Credit terms

Variation margin is essentially the amount of money that you need to put forward to place a trade and maintain its position. It is referred to as variation margin as the amount varies from case to case. The amount of margin is usually a percentage of the amount of the size of the forex positions and will vary by forex broker. Margin means trading with leverage and can increase risk and potential returns. It is vital that you understand the terms of your account before entering any trade. Your trade setup, trade trigger, the stop loss, the price target, and the reward to risk ensure that your trades align with your currency risk strategy and trading style. A profit margin, however large or small, can dwindle quickly when faced with sharp, unfavourable currency swings. The correct credit terms are another ‘must’ as they can smooth out your payment and trading terms. For example, if it takes days to receive funds across the globe, your delivery schedule may increase and leave customers frustrated. The FX market is open 24-hours a day, 5 days a week, in major financial centres around the world. Peace of mind plays an essential part in managing your currency risk and a currency hedging policy affords your business with a level of certainty that cannot be found elsewhere.

FX deposits provide the security of a locked in rate and more accurate financial forecasting. This is especially useful for clients who have purchased currency via Forward Contracts. Averaging is a hedging strategy that allows you to settle average transactions against average prices over a period of time. This can be beneficial to hedging against a single price fixed on a single date. Try to ensure your hedging policy averages the market (where appropriate). Trading forex is volatile and fast-paced. Hedging is your strategic safety net, allowing you to protect trades, your investment portfolio and combat currency risk. Whilst all trades carry risk and there is no way to prevent the market from moving against your position, your successful hedging policy can minimise the amount you might lose. It bears no material difference to taking out a business insurance policy to protect you from any future potential adversity.


The Leading Solutions for Businesses Managing Currency Issues

In a survey conducted by HSBC, 70% of CFOs reported their company suffering reduced earnings due to avoidable, unhedged FX risk. This currency risk applies to any business that imports, exports, makes international payments, or operates overseas. A more strategic view can prevent your business from adding

to the unfavourable statistics and suffering losses. With the monumental rise of eCommerce, more and more UK businesses and SMEs are launching new products and moving into foreign markets. Hedging and the global forex markets can feel complex but essentially forex is the simple trade of one currency for another and hedging is your risk management policy to offset any losses associated with those trades.

Good enough. But how does it work on a daily basis?

Businesses trading overseas have two options:

  1. You can do nothing. Perhaps everything will average out over Your business might “win some” and “lose some.” The issue here is that the “wins” do not have the capability of wreaking havoc with your supply chain, hindering cash flows, or even causing bankruptcy.
  2. Hedging strategies. You can deploy hedging strategies to manage your business currency Hedging is not about creating profits from your trades but more about minimizing any losses, keeping your business stable and your risk known.

Managing your currency risk usually involves a blended approach of risk identification, strategy, and execution.

There are then several hedging strategies to choose from that can help you secure the best rate and protect cash flows and gross margins. Forward contracts, futures and instant transactions are three such common strategies.

Financial controllers like numbers. They like known. Hedging provides a holistic view and affords greater financial reporting, accuracy, and visibility. There is strong evidence that hedging also improves shareholder value and the perception of stability by investors.

Previously, there were not tools or analytics to help international businesses master their currency risk. However, advancements in data and tech mean that companies can achieve greater protection than ever. Automation removes sentiment, controls risk and much like the FX markets – can operate while you sleep.

Hedgemaster is the predictive tool that allows you to manage your currency risk all in one place yielding business peace of mind. Via a data-driven analysis and continual monitoring, it uses key information about your business (such as your growth rate, profitability, and risk appetite) to estimate your cash flow exposure.

With continual updates and notifications, you will always know when it is time to take action and your dedicated FX specialist can execute any hedging requirements identified by Hedgemaster and prevent avoidable FX losses.

For further reading on managing and mitigating the risks of foreign currency, please click here.