4 key aspects to any successful FX strategy
04/Dec/2014 • Currency Updates•
Although each organisation is different, all may experience similar problems with currency procurement and management. If your company has business relationships or projects overseas, particularly working with highly volatile emerging markets, proper planning and currency management is incredibly important in order to eliminate exchange rate uncertainty.
To properly address the currency challenge, your finance department, alongside your specialist currency provider, has to make decisions and act to ensure that currency fluctuations do not hinder the proper functioning of your business and exchange rates do not amplify the risks posed by international trade.
Analysing your currency exposure and putting in place effective risk management structures are key to the success of international operations. However, this can be a complex task for many SMEs who have to focus their financial resources on the day-to-day activity of the company.
Here we identify some of the most important aspects your business can implement in order to effectively mitigate the risk of currency rate fluctuations which arise from overseas operations.
1. Planning and Budgeting
Investing up front in thorough planning and budgeting activities will allow you to have more control over your balance. Firstly this allows you to better manage your cash flow and statements and secondly, you can effectively time your currency transactions in order to trade at the most preferential time in the market. You can optimise your transactions by concentrating greater volumes of currency so as to incur lower costs and anticipate your future currency needs through the use of hedging products. Utilising effective risk management tools can eliminate the risk of currency volatility to which your company is exposed.
Ultimately, the planning of your operations helps your finance department to identify the risks inherent in any transaction and consequently, improve the effectiveness of your decisions.
2. Risk identification and strategy
For many SMEs, the proper management of currency risk can be a complex task, which can distract the accounts management from their main purpose. However, ignoring the issue of currency can seriously affect the commercial success of any business working overseas. That is why it is highly advisable to enlist the help of a specialised FX organisation so that together you can identify the risks posed and avoid unwanted and unforeseen negative impacts on your bottom line.
Depending on the currency you procure, you can choose different forms of transaction, from the simple Spot transaction to complex risk mitigation tools. Risk management can be simple hedges or more complex hedges, spanning emerging market economies and depending on the risk aversion of your company. Many organisations choose to place a Forward contract for a large proportion of their desired currency, say 80%, and then purchase the remaining amount, in this case 20%, via Spot transactions as and when they need to and when the market is in their favour. This allows for increased flexibility.
You can read more about the different risk mitigation tools, here.
3. Monitoring and analysing your currency trades
It is important to track your currency trades in order to see patterns in the volumes and timings of your trades, compare pricing and better understand which currency services would be most appropriate for your organisation. For example, you may find out too late that you would have benefitted from the implementation of a Forward contract but you can use this information to better plan and budget your future transactions.
A currency specialist offering expert market insight and rate predictions, which correspond to your particular exposure, will be essential to your foreign exchange strategy. They will allow your business to effectively anticipate market fluctuations, execute your trades at the optimum moment to make the most of market upswings, and mitigate risk.
4. Increased competition amongst your currency providers
The emergence of new currency providers, who compete with traditional banks, promotes competition in the financial industry. They strive to create new ways to trade, offer improved rates and service, and have caused banks to come under scrutiny for lack of transparency in their foreign exchange operations. The main beneficiary through this whole process is your business, the consumer, which can gain increased transparency into your trades and better rates and service through the competing organisations.
Historically banks have been the main providers of foreign exchange but these new challengers have the potential to revolutionise the FX industry. It is important to consider how a large corporate bank may view your foreign exchange transactions. Are your payments going to be dismissed as ‘nuisance payments’? Are you going to get all the benefits a larger client would experience? When using your bank there is a risk of being a small cog in a big machine, with no personalised service or specialisation in the markets with which you wish to trade. That is where alternative currency providers can prove more beneficial and offer the proactive service your business needs.
Make sure to open a competitive tender process for your foreign exchange in which you consider all aspects of the different currency providers from price, to speed of transaction, market specialisation and service level. Working with the right foreign exchange provider for your business can dramatically improve your ability to operate internationally and deal with overseas suppliers.
To find out more about currency services, enquire online.
Also you can ‘Subscribe to our updates’ in the column on the right to sign up for Ebury’s daily and weekly market insight emails. Ebury provides clients with detailed currency profiles across the G10 and emerging market economies, and updates on macroeconomic and political data.