Risk management strategies the banks keep reserved

Claire Hogarth25/Sep/2014Currency Updates

Major high street banks have recently come under fire from the Competition and Markets Authority (CMA) for not meeting the needs of small and medium size enterprises (SMEs). Their service level is unable to meet SMEs’ evolving and increasingly complex needs. As trade becomes more global, SMEs are exposed to foreign markets, as importers, exporters or both. This trend is now firmly set and SMEs’ global exposure will only intensify. Despite this, the banks are unwilling or unable to provide the services and facilities needed to support SME growth in this global context. It is vital that SMEs have an alternative option.

Ebury’s currency services offer a life-line to SMEs who are seeking fair rates, access to emerging market currencies and comprehensive risk management strategies. Banks often restrict access to these services to their larger corporate clients. As a result, SMEs that are considered as “lower value” clients by the banks are restricted to trading through the simplest spot contracts, paying high spreads, and with little-to-no information about expected market moves or advice on to hedge against their currency exposure. Therefore, many SMEs are unnecessarily exposing their bottom line to currency fluctuations, which could be easily avoided by working with the right currency provider.

So, does your bank offer you…Forward Contracts?

A Forward Contract allows you to set a price for a specific volume of currency to be used within a certain time frame (Window Forward) or at a specified point agreed in the contract (Fixed Forward). Fixed Forwards are most useful when there are set days that funds must be paid or transferred, as they do not allow for any flexibility in timing. Window Forwards give you the flexibility to withdraw any fraction of the contract, at any point in a pre-specified period of time.

With a 0% deposit?

For Forward Contracts, banks and brokers typically take a deposit to mitigate the counterparty risk they are exposed to. This forces SMEs to tie up badly needed cash, just to secure the use of the Forward Contract. This cash could be put to much better use. Ebury has a strong balance sheet and much higher levels of capitalization than banks. Therefore, Ebury is able to ask for as little as 0% deposit on Forward Contracts from solvent clients. Of course, this is dependent on individual company financials, but our balance sheet nearly always allows us to offer more flexible credit terms than the banks.

Non-deliverable Forwards (NDFs)?

Unlike a standard Forward Contract, upon expiry the client does not take delivery of the underlying currency. Instead, the difference in price between when the contract was booked and the fixing rate upon maturity is calculated and exchanged between Ebury and the client. This allows the client to hedge currency risk in markets where severe restrictions exist on the delivery of the local currency.

Market orders?

Ebury can manage your currency needs on your behalf, 24 hours a day through market orders. Market orders are instructions placed in advantage to buy or sell a currency when it hits an agreed rate during a specified period of time. Market orders can be instructed for both Spot and Forward Contracts, giving you an large degree of flexibility and the ability to take advantage of overnight moves in your favour.

Hedging?

If your business has fixed, or predictable, foreign currency costs or income throughout the year it makes sense to purchase or sell that foreign currency with a Forward Contract to fix the exchange at a level that ensures profitability and budgeting. But, if your costs are more flexible, there is always the option of purchasing a percentage of the total initially on a Forward Contract (50% for example) and exchanging the rest using Spot Contracts as and when you need to.

Forecasting?

Ebury consistently ranks highly as a forecaster in Bloomberg, the premier venue for FX forecasts. Ebury provides clients with access to comprehensive market data allowing you to manage your currency exposures accordingly. In particular, our coverage of the less followed “frontier markets” is second to none. Ebury’s team of market analysts is based in New York and headed up by Chief Risk Officer, Enrique Diaz, former Managing Director at Société Generale.

Proactive Market Insight?

Banks often react to currency moves when it is too late to protect their clients. Ebury provides detailed market insight on a regular basis so you are always informed of currency moves and any news that may affect your currency portfolio. Ebury also proactively monitors the market on your behalf, providing tailored risk analysis, daily reports on market moves, weekly summaries of the market positions and currency profiles across G10 and emerging market currencies. Special Reports on significant currency moves are supplied by Ebury’s Chief Risk Officer and hand-picked by your dedicated Currency Specialist in line with your currency exposure.

If your bank does not offer these facilities and you are interested in Ebury’s currency services, get in touch today on 0845 519 1009.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.