| Foreign exchange risk and instructions on how to
avoid them It should come as no surprise to anyone that more and more British-based businesses are looking to operate within foreign markets, taking advantage of cheap overseas labour, importing at cost-effective prices from other countries and exporting products and services. Emerging economies and developing nations can often offer British companies more in terms of value and selling opportunities than the markets at home, and as home-grown brands move further around the world, the need for foreign currency increases. However, the companies that are new to the global game should be made aware of the potential foreign exchange risks that could sabotage the profits and success of conducting business overseas. Toby Fischer, a foreign exchange expert, explains that all businesses operating on a global scale must be aware of the associated risks. He says: “A greater number of businesses are enjoying success from foreign markets, but foreign exchange risk is prevalent, and companies need to use bespoke brokers if they want to guarantee against losing out on profit by not protecting themselves and understanding how volatile the markets can be.” Market volatility And market volatility is the key area that businesses need to be aware of, because the value of the British pound can change quite dramatically over a short period of time. Often, unprepared businesses find that their profit levels peter out because the exchange rate at the time of deal negotiation is massively different to the level when the deal is actually completed. Foreign exchange risk in terms of an ever-changing currency market should never be underestimated, and all too often businesses that are new to operating on a global scale do not factor in its volatility and end up losing valuable profit. As an example of foreign exchange risk, since June 2010 sterling has dropped 10 cents (8%) from 1.23 to its current level of 1.13, while the pound has fluctuated wildly against the US Dollar since the beginning of June 2010, moving between a 16 cent range of 1.46 to 1.60. Fischer adds: “Companies should always consult with currency specialists before they make a foreign exchange deal, that way they can clearly work out the associated risks and put together a strategy to avoid losing potential profits.” Protect against foreign exchange risk Interestingly enough, the market will rise up and down, and if
businesses do not protect against this volatility they run the risk of
losing money, or in some cases making money, if the exchange rates
fluctuate in their favour. However, businesses that want to be able to
calculate their profits going forward and are keen to run a business
based on actual costs and margins, as opposed to ones that are
constantly changing, are using different foreign exchange contracts to
secure their rate and minimise their foreign exchange risk. Fischer
points out that the better foreign exchange companies offer businesses
the opportunities to fix their margins, and resist volatile rates. He
explains: “Companies operating overseas can use foreign exchange
companies to lock in the profit margin that they make on a product or
service, and this is crucial for businesses that want to forward plan.”
Companies can protect against volatile exchange rates through a series
of contracts that actually allow them to secure a rate on a given day by
paying a deposit. They then have a period of time in which to use a
certain amount of funds at the arranged rate. This way, businesses have
a guarantee that no matter what the exchange rate, there is no risk. |
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Last updated: 23-11-2012
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