And when you have FX volatility, it’s seriously time to think about hedging.
We say this given the recent events in the Middle East. As a spillover from the ongoing Israel/Gaza war, the Red Sea has now become a very dangerous place for global merchant shipping.
As one of the world’s key arterial maritime routes, the effects of Houthi attacks on cargo freighters has become a serious concern for worldwide trade.
Airstrikes by US and UK fighter jets have been designed to quell these impromptu assaults from Yemen. It remains to be seen whether this will result in any further escalation in hostilities.
One thing’s for sure – the unrest is having a significant impact on global supply chains. For anyone involved in international trade and commerce – especially where currency transactions are taking place – it is hard to escape the fall-out from the current situation.
Impact on sales margins
Global currency rates inevitably get caught up in the crossfire of geopolitical events such as this, making cross border money transacting unpredictable. This is particularly important because fluctuating foreign exchange rates can affect the sales margins that companies use as the basis of their decision-making.
The problem is that most businesses can’t simply cease making international payments during uncertain times – the daily flow of business depends upon continuity.
That’s where hedging strategies can be a vital tool. Since currencies don’t work in isolation – and their relative strength or weakness may be affected by events taking place on a different continent thousands of miles away - hedging provides financial protection from the vagaries of the international markets.
It’s the best way to mitigate against currency risk.
Fall-out from the failure to hedge
Currency hedging is a risk management technique to counter foreign exchange fluctuations. It particularly applies to international equities and transactions, for businesses and investors who sell globally or who have overseas holdings.
Even so, businesses aren’t always quick to latch on to the benefits that hedging can provide or are simply unaware that such opportunities exist.
A recent survey of CFOs by FT Remark and HSBC revealed that as many as 70% of internationally focussed businesses had experienced a reduction in earnings, as a result of a failure to hedge their FX risk. And well over half admitted that currency risk management was an area where their expertise was remiss.
Here at MFX, the specialist Isle of Man-based foreign exchange brokerage, we are partnered with moneycorp, world leaders in international payment transactions, with decades of experience handling cross-border transactions during turbulent times.
When a company, typically an importer or an exporter, engages in transactions that are denominated in a foreign currency, there is a risk that it will be affected by fluctuations in currency exchange rates. In the worst-case scenario, these fluctuations can significantly impact a company’s operating profit and ability to expand its operations, moneycorp states.
What is the purpose of hedging?
The main purpose of a hedging strategy is to provide businesses with a level of assurance when it comes to budgeting, forecasting and managing market expectations.
It’s an effective way of protecting finances from being impacted by a negative or unforeseen event – such as this latest hiatus in the Middle East.
If correctly handled, the hedge should, at the very least, minimise any potential downside.
If you are engaged in any of the following, you could be exposed to currency risk:
- Importing or exporting goods and services
- Foreign investments, goods and dividends
- Overseas offices/paying salaries or bonuses in a foreign currency
- Buying or selling overseas property/mortgages
- Overseas probates
- Repatriation of profits
Ways to manage FX Risk
There are a number of available hedging options for businesses to help manage foreign currency exchange risk. These include currency forward contracts, money market hedges and forex swaps.
Whilst they all differ, they provide ways to fix a pre-arranged exchange rate ahead of any future transaction, to lock in the value of a future foreign exchange or currency transaction, as well as to hedge exposure to exchange rate movements when using different currencies.
They are all proven and effective techniques to help businesses (and those acting on their behalf, such as corporate service providers) to manage risk and safeguard profit margins.
Next Steps
If you are engaged with international payments - whatever their size, frequency or complexity - but have no experience of hedging, now could be time to give this serious consideration. In light of the latest destabilising global events, this is especially pertinent.
MFX has been operating on behalf of Isle of Man companies and CSPs since 2014. Our business is a wholly owned subsidiary of the AIM-listed MFG Group and a sister company of Conister Bank.
If you have any concerns about your current FX arrangements and would like someone to take a fresh look at your present strategy, talk to us today. We are confident that we can point you in the right direction.
For further information about the services MFX provide, call 694722; email: enquiries@mfx.im or go to the website www.mfx.im.