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The Ultimate Business FXCheat Sheet in 10 Steps

Management Cheatsheet In 10 Steps

In the fourth quarter of 2015, Apple lost a

stagger ing $3.75 bi l l ion in re venue due to the

strong US dol lar impact ing on global sales. 5% of

i ts total re venues for Q4.¹

Fortunately for Apple i t has the f inancial c lout to

withstand such beat ings f rom the currenc y markets .

But i f your company is l ike most with exposure to

foreign currencies, taking a 5% hit on re venues

because of exchange rate volat i l i ty is s imply not an

opt ion.

Corporate Currency Risk Management In 10 StepsWhile there are no exact f igures,

approximately 55% of SMEs² in the UK

do not act ively hedge their exchange

rate exposure at a l l . The y just leave

their prof i t margins to the merc y of the

constantly f luctuat ing FX market .

A lot of companies think that i t wi l l

“e ven i tsel f out” over t ime – losses in

one quarter, gains in another – and that

hedging is complicated and cost ly. This is

an i l l -advised approach.

The truth is that i t needn’t be cost ly, i f

you benchmark and shop around among

FX providers . As for being complicated,

the hedging products that are the most

benef ic ial are the most s imple – for ward

and options contracts , for instance.

Hedging, l ike anything, takes a l i t t le

gett ing used to but i t is not complicated.

Understanding i t and how to employ an

ef fect ive hedging strategy are essent ial

in control l ing FX r isk , keeping your costs

down, and stopping any nasty surpr ises

f rom taking a chunk out of your re venue.

While there are many companies who neglect to hedge, there is another

group who go the other way and overdo i t , hedging their ent ire exchange

rate r isk without ful ly understanding what the y are doing or how to

hedge.

Banks have sales teams whose target is to make as much prof i t as

possible. In order to do so, their sales reps are g iven targets to sel l

complex hedging products s imply because the y cost a lot more for you

than the more s impler products .

And the y convince you that your company needs them. Real ly the

only companies that need such complex products are large caps and

mult inat ionals in dozens of markets around the globe. SMEs by and large

do not need them. Which br ings us to our next point …

Understand How To Hedge Your Risk. Properly1

Something that happens too often in corporate foreign exchange r isk

management is that companies buy complex hedging products , the y

don’t ful ly understand them, and the y end up out of pocket and without

a ful l understanding of their own hedging strategy.

Keep i t as s imple as possible by knowing your needs and how to meet

them effect ively and as cost-ef f ic ient ly as possible.

Look for an FX provider who wi l l take the t ime to analyse your

company’s exposure and real ly explain what k ind of s impl i f ied hedging

product , such as a for ward or an opt ions contract , is best under certain

c i rcumstances.

Simplify Your Currency Hedging Policy2

These quest ions wi l l help you to gauge whether you

are with the r ight FX provider :

Review Your FX Provider Costs With These Questions3

What is the spread on the exchange rate?

Does the spread percentage change on the same currency pair over time?

Is there an additional cost for delivery of funds?

Are there any other costs involved?

The spread – the addit ional charge added by the bank or broker to the exchange rate – is often between 1% and 3%, sometimes more. I f the provider is t ruly transparent , the y wi l l d isclose this information to you. I f not , i t ’s a s ign that the y are not being completely honest and that the y are taking a large commission fee f rom your company in the form of an undisclosed spread.

A tr ick that is unfortunately common in corporate foreign exchange goes l ike this : in order to attract your company as a c l ient , many brokers of fer an incredibly good opening exchange rate with an unusual ly smal l spread.With t ime and more transact ions, the spread is widened, with no disclosure. This br ings us back to quest ion one – a lways asking what the spread percentage is wi l l stand your company in good stead.

There is often an addit ional fee le vied on your company for sending the funds f rom your bank account to the benef ic iar y’s . This is a second commission on top of the spread for the exact same transact ion. A provider who sends your funds with no addit ional charge wi l l cut this cost out .

The tradit ional f inance sector is of course known for applying hidden fees. Ask i f there are any, and why. Does i t sound l ike a ploy to get more mone y from your company? I f so, i t ’s a s ign to look else where.

Q.1

Q.3

Q.2

Q.4

Review Your Currency Service Provider4

How fast are the payments? Are same

and next day internat ional payments

avai lable or do the y take more l ike 4 or 5

business days, or longer?

Are the y knowledgeable? Do you have a

personal ly ass igned, exper ienced dealer

or do you have to deal with cal l centres

with di f ferent te l lers e ver y t ime?

Are the y transparent in their pr ic ing and

processes? Are the y regulated by the

rele vant body (FCA in the UK)? These are

al l good quest ions to ask .

Crucial ly, you needn’t feel l ike i t is too

much to ask these quest ions – i f the

bank , broker or a lternat ive provider puts

c l ients before prof i ts , the y wi l l be happy

to answer these quest ions and more. And

the y wi l l have nothing to hide.

Pay In The Local Currency Of Your International Supplier

Don’t Take On The FX Market. Ever

5

6

In order to cover their own foreign exchange r isk , many suppl iers charge

you a premium on top of their typical rate in their own currenc y.

Ask them for an invoice in their currenc y, rather than US dol lar or

another reser ve currenc y you might be using. You can then calculate i f

there is a di f ference.

I f s izeable and you already have a strong hedging strategy in place,

would i t make more f inancial sense to take on the FX r isk and lower

suppl ier costs? An addit ional bonus is that your suppl iers wi l l be happier

that the y receive payment in their own currenc y.

Leaving your company exposed to exchange rate f luctuat ion, bel ie ving

that you might benef i t f rom a strengthening of your funct ional currenc y

for instance, is nothing more than speculat ion.

The FX market is so volat i le with so many factors that inf luence exchange

rate movement that i t is s imply impossible to cal l . You might get

lucky sometimes, but most of the t ime you almost certainly won’t and

speculat ing with your company’s mone y is dangerous.

Don’t Hesitate To Lock In A Loss

Forecast Well For Good Business FX Management

7

8

Should the exchange rate move against your

interests , and often this happens after you have

your accounting in order for the per iod ahead,

don’t be afraid to lock in your loss by hoping that

your luck wi l l turn. Take out a hedging product –

a c losed or open for ward – to hedge that r isk .

I f not , that loss can worsen over a longer

per iod of t ime. Stamp i t out by accepting a less

detr imental h it .

Forecast ing can include ver y opt imist ic v ie ws. Of course forecast ing is not easy,

but many companies make i t more di f f icult than i t has to be by including sales

and re venue goals in there.

Get a t ighter re ign on your forecast ing, part icular ly i f you have accounts

receivable and payable in foreign currencies, which can be tr ickier to gauge.

Better forecast ing pr imes your company for a more real ist ic v ie w and of how to

react to FX volat i l i ty should the need ar ise, and i t wi l l ar ise.

Fully Understand The FX Tools And Processes That Will Save You Time And Company Money9

Following market movements, central bank decis ions and macroeconomic

pol ic y is t ime -consuming. T ime that you l ikely don’t have.

There are currenc y providers that of fer guidance in managing exposure.

Look for a provider with a personal ised ser vice and a knowledgeable

dealer team.

As for tools , understand how l imit orders and stop loss orders work and

can be of benef i t to maximise gains and minimise loss on the exchange

rate, respect ively.

FX alerts are also a handy way of automating the process of fol lowing

exchange rate movement .

Keep Your Eye On The Ball10It’s a l l wel l and good gett ing a good business FX management strategy in

place. Essent ial . But i t is easy to let complacenc y of some degree set in

a long the way.

To of fset this , i t i s strongly advised to schedule per iodic re vie ws of FX

providers – say bi -annual ly, where you can benchmark your current

bank , broker or provider against others ; looking at ser vice, pr ic ing and

responsiveness, among other points .

EIGER FX

Final Word

With these 10 steps to a good business FX management strategy, your

company wi l l be wel l on the way to lowering i ts FX costs , re ining in

volat i l i ty and making your process much smoother and less t ime -

consuming.

I t real ly needn’t be as daunting as i t may f i rst appear, and once you get

over the f i rst , most di f f icult hurdle in deciding to overhaul your strategy,

i t wi l l be much easier.

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