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The post-Brexit Pound: Can you mitigate your foreign exchange exposure?

by Saskia Johnston | Nov 28, 2016
  • After the Brexit referendum in June, many UK-based SMEs have found themselves in a precarious position on the back of a weaker Pound. An SME importing products from Europe had their costs increase by at least 22% at one point. This severely affects bottom lines and, in some instances, is fatal to their business. Let’s take a look at how you can minimize the effects of a weakened currency.
    A multi colour piggy bank on the table with money and a cup

    I’ve lost count of the amount of times I have been asked what will happen with various currencies over the last few months. Where will the Pound go? What will happen to the Euro? Everyone in the UK is concerned, and rightly so.

    With so many factors at play, I can’t pretend to know the answers to these questions. The post-referendum economic situation in the UK is steeped in uncertainty. This, coupled with a macroeconomic climate and an indecisive Europe, creates a perfect storm of volatility.

    While the circumstances surrounding the currency market can’t be forecasted with certainty, there are many tools one can use in an attempt to mitigate exposure to foreign exchange volatility.

    Forward contracts: Lock-in your profits

    Many companies with a foreign currency amount due at a predetermined future date make use of forward contracts.

    A forward contract secures an exchange rate for an agreed time in the future. This contract could cover just one or multiple payments on different dates.

    By booking forward, you are obliged to buy or sell the currency at the agreed price, on a specified future date. You can fix an exchange rate for up to one year in advance, thereby removing your currency risk.

    Although a forward contract does limit any potential upside gain, it also allows SMEs to fix their mark-up and lock in their profit.

    This allows you to continue working on the job at hand knowing that your rate is locked in and your risk is hedged, regardless of what the markets do.

    Limit orders: Protect your profits

    Companies or individuals with a shorter currency exposure might want to explore limit orders.

    A limit order provides an upside price target. You set a price target above where the market is currently trading; when the market hits your price, your order is automatically filled.

    A stop-loss order does exactly that: It stops loss. It allows you to set a "worst case" price to trade at below the current market level. Your order will be filled if the market drops to (or past) your protective price.

    The best of both worlds

    Limit and stop orders are known as market orders. They are often run together as a combined OCO order ("One Cancels the Other"). The moment that your upper or lower price target is hit, your order will be filled at that price and the other price target is immediately cancelled.

    OCO’s allow you to trade in a playing field with substantially less risk.

    Knowing your upper and lower limits mean that your risk is hedged or ring-fenced between the two upper and lower rate limits. This can provide peace of mind and allow a business owner to focus on their core business knowing that their currency exposure has been taken care of.

    Split your gross amount up into a sequence of smaller transfers if your currency need is not time sensitive.

    This provides a natural hedge against some of the exchange rate risk and although the rate may move for or against you, the net effect becomes less.

    Many business owners underestimate the financial value of seeking foreign exchange advice, but it most certainly is worthwhile having a conversation with a foreign exchange broker - regardless of your exposure.

    With professional advice, you can ensure you achieve the best currency transfer outcomes for your business.


    If you’d like more information on market orders or how Sable International’s +44 20 7759 5401 or send me an email on saskia.johnston@sableinternational.com.

     

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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