If you run an import-export business, there’s a strong possibility that you will be acquainted with the ups and downs of the currency markets.
Cross-border transacting, whether that involves mainstream or less well-known currencies, goes with the territory for those who bring goods in, or send goods out.
The markets never stand still, they are constantly in flux. As a result, you may have been caught out by a strengthening Dollar or a weakening Euro. If you’ve transacted at the wrong time and without a clear strategy in place, your business could have taken a big financial hit.
The fact is, that managing currency risk is an integral part of being a successful importer / exporter.
So, what strategies should you follow, to successfully ride those waves of currency turbulence in order to prevent company profit margins being shipped overboard?
Firstly, it’s important to have a good understanding of what lies behind exchange rate movements – from global economic trends, to localised fiscal weakness or political upheaval in a country with which you need to transact. All you have to do is look at the impact on the Dollar of the current tensions in the Middle East.
Just as vital is knowing which hedging strategies or financial instruments you can implement, to offset any unfavourable currency movements.
Pricing Uncertainty
Many businesses operate on tight profit margins – so fluctuating currencies can disrupt the pricing of imported and exported goods. Volatile exchange rates can make it extremely challenging to set a price that remains competitive, whilst enabling the business to make a decent margin on the transaction.
If you have a strong domestic currency and you are exporting goods, this can make you expensive and eat into margins. On the other side of the coin, a weaker domestic currency can push up the costs of imports which, again, can impact your profitability.
As an example, a sudden appreciation or depreciation in a particular currency could directly impact the cost of imported goods – making the products way more expensive than you’d bargained for.
It can quickly become an all too time-consuming chore of constantly monitoring prices or adjusting profit forecasts to play the system.
Nevertheless, it is quite possible to use currency fluctuations to your advantage – paving the way to opening up new markets. In a situation where the domestic currency is on a high, imported goods can start to look less expensive, which provides an opportunity to exploit new markets and customers.
Hedging Strategies
To maximise the opportunities – and potential challenges - that currency exchanges can present, it’s wise to have a handy hedging strategy in place; one
that minimises risk against unfavourable exchange rates, but that offers plenty of upside when fluctuating market conditions are on the dance card.
Balancing the two, can require some deft calculations and forecasts, so that you come out ahead regardless of day-to-day market conditions.
Diversifying market exposure to ensure your business can operate in a more secure environment is something often best left to the experts.
You might have an in-depth knowledge of garden furniture or luxury cars but getting the end product to an overseas destination or safely onto home soil – in the most financially advantageous fashion - is sometimes preferably delegated to an FX provider with in-depth knowledge of an import/export business’s FX requirements.
Using forward contracts to hedge your currency requirements, can help you to manage your currency exposure and the risk that comes with it.
The last thing you need is to see your hard-earned profits being eroded – when some timely FX intervention could have kept your finances under control.
About MFX
MFX is a dedicated foreign exchange brokerage that has assisted import/export businesses with their FX requirements over a number of years.
Isle of Man based, with a growing on-Island and overseas clientele, we are a key partner of moneycorp, world leaders in the international payments arena, who offer the most competitive market rates in more than 120 currencies.
If you operate an import-export company and you would like to explore new avenues for maximising opportunities and minimising risk around your international money transactions, we can point you in the right direction. For assistance, call MFX directly on 01624 694731 or email enquiries@mfx.im
MFX Ltd is a wholly owned subsidiary of the AIM-listed Manx Financial Group. Bank.