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A guide to managing currency risk Nine foreign exchange mistakes your business should avoid
NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
Nine Foreign
Exchange Mistakes
Your Business
Should Avoid
All businesses, large and small, with any
exposure to international currencies can
find it challenging to manage foreign
exchange risk. Smaller businesses,
immersed in the day-to-day operations of
running their firms and lacking specialist
staff, may lack the time and the expertise
needed to get a handle on foreign
exchange. Larger businesses may have
many other priorities that prevent them
taking a strategic view of currency risk.
While it may be tough to manage foreign
exchange, the costs of failing to do so are
potentially very high – all the more so
given the uncertain times in which we
currently live.
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NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
In the aftermath of the UK’s vote to leave the European Union, the
value of the pound against the dollar fell 12 per cent within hours.
Introduction
Three months later the figure had reached 15 per cent*. That can be
devastating for a business with FX exposures.
In fact, the world’s foreign exchange markets are often volatile and
sometimes extremely so. The reaction to Brexit was certainly unusually
strong – that 12 per cent one-day drop is a typical trading range for
sterling over a whole year – but far from unprecedented. In 2015, for
example, the Swiss Franc rose by 30 per cent against the euro in a single
day after the country’s central bank changed a key policy.
REFERENDUM IMPACT EXAMPLE:
A British shoe retailer, say, buying €10,000 of Italian shoes one day
before the referendum would have paid around £7,681 for its goods;
a day later, the bill would have risen to £8,160**
XE supports more than 6,000 businesses a year, all around the world,
as they manage their foreign exchange and plan ahead to mitigate the
dangers of this kind of volatility. But many more are not confronting
this challenge – and making the same mistakes over and over again. In
this guide, we set out to identify those mistakes, not least to help more
businesses avoid them in the future.
This is not to suggest that all businesses face the same issues. Smaller
businesses just getting started with international trade, whether
importing or exporting, may be overwhelmed by the decisions they need
to make and struggle even with short-term choices. Meanwhile, larger
businesses may be more sophisticated, with basic systems in place to
manage day-to-day currency transactions, but they often lack a clear
idea of the bigger picture, or how to manage risk holistically.
Both types of business are vulnerable to many of the mistakes detailed
in this guide. But the biggest mistake of all may be failing to realise that
you’re not on your own here – for while parts of foreign exchange may
be daunting, professional advice and service will help. Some businesses
choose to get their support from their banks, but an increasing number
are opting to work with specialist advisers such as foreign exchange
brokers, which focus purely on currency.
In short, all businesses have an opportunity to learn from their mistakes
– and in this bumpy environment, now is the time to do so. This guide
can help you start the process.
æ
*Source: Reuters.
**Source: www.bankofengland.co.uk daily spot exchange rates against Sterling:
€1.3018 on the 22 June 2016 & €1.2254 on the 24 June 2016.
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NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
Content
ot knowing whether you’re exposed to
N
1 Page 3
foreign exchange risk, or how much
ot having a foreign exchange risk
N
2 Page 4
management policy in place
3 Focusing only on the rate Page 5
ot understanding the breadth of
N
4 Page 6
products available to your business
etting overwhelmed by
G
5 Page 7
complex administration
6 Not having a handle on compliance Page 8
7 Poor internal communication Page 9
Working with a foreign exchange
8 Page 10
provider stuck in rigid processes
9 Not shopping around Page 11
10 About XE Page 12
4 www.xe.com/business
NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
1
Not knowing whether you’re exposed to
foreign exchange risk, or how much
Many businesses, particularly at The important principle here is to Similarly, while those imports
the smaller end, are not aware recognise that a risk exists and potentially present a currency
they have an exposure to foreign then try to assess its potential size. headache, if your business also
exchange risk. Even if they are, they That will require you to make some sells around €100,000 of its output
have never quantified the size of quantitative assessments, but also into the single currency area, you
the risk they face. If you’re in that some qualitative judgements. already have some protection in
position, it is more likely that the place. A fall in the value of sterling
impact of currency market volatility FOR EXAMPLE: would see your import costs
on your business will come as a increase but could also provide a
nasty shock. A business that imports €100,000 boost to your export revenues. In
of European goods each year isn’t other words, you need to focus on
Currency market exposure comes exposed to €100,000 of currency your net currency exposure rather
in different forms. Any business risk – the pound/euro exchange rate than a single element of the risk.
selling goods and services overseas isn’t going to fall to zero. In other
will be concerned that a rise in the words, assessing the true value The other factor here is time.
value of the pound could damage of your exposure going forward How much visibility do you have
their competitiveness in those will require you to make some of your business’s costs and
markets. Conversely, if you’re estimates of how much volatility revenues going forward? And how
importing anything from overseas – in the currency markets is likely – far ahead are you able and willing
raw materials, for example – a fall in you might do that, for example, by to plan? The further you look ahead,
the value of sterling will make those looking at the range in which rates the harder it may be to make
imports more expensive. have moved in the past. accurate assessments.
Equally, don’t forget balance sheet If you’re not sure how to assess
risk: many UK businesses have currency exposure, quantify the
international subsidiaries and potential risks your business faces,
entities that do their day-to-day or survey the market outlook
business in another currency. for the months ahead, consider
If so, the value of those operations, reviewing your options with a
when accounted for by the UK head foreign exchange specialist.
office, will be affected by exchange
rate movements.
www.xe.com/business 5NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
2
Not having a foreign exchange risk
management policy
Having quantified its potential Nevertheless, all risk management But be careful to make strategic
currency market exposures, the policies should cover some basics. planning decisions, rather
next step for a business should be They will set out parameters than falling into the trap of
to set out a plan for managing this detailing how much foreign attempting to respond tactically
risk. Larger businesses in particular exchange risk the business is to day-to-day developments.
could consider a risk management prepared to accept and over what
policy that details the company’s time periods. They will detail the “Many businesses
approach to foreign exchange tools that the company is prepared
risk – this will give you an ongoing to use in order to mitigate these are not aware they
framework for managing volatility,
so that you don’t have to react on
risks. They will also specify who at
the business is authorised to
have an exposure
an ad hoc basis. make decisions. to foreign exchange
risk. If you’re in that
“The nature and The aim should be to develop
a robust process for managing position, it is more
detail of your policy currency risk on an ongoing basis,
in a format that can be shared than likely that the
will depend on the amongst a group of people rather impact of currency
magnitude of the risk than devolving all responsibility to
a single person. This needs to be a market volatility
your business faces.” collective policy, widely understood, on your business
that the company can apply at all
The nature and detail of your policy times and that is not abandoned may come as a
will depend on the magnitude
of the risk your business faces.
because a key person leaves or
is off sick.
nasty shock.”
A company with, say, £1 million
Any business that isn’t sure how
turnover is naturally going to be Your foreign exchange risk
to develop a risk management
much more concerned about a management policy also needs
policy, or what might be
potential £200,000 net foreign to be updated regularly – at least
appropriate for such a document,
exchange exposure than a business once a year, say. Inevitably, your
should review options with a
with the same risk but £10 million business will evolve over time, as
foreign exchange specialist.
of sales. In other words, context is may the nature of the risks it faces.
important here. As your exposure to particular
overseas markets rises or falls, or
as the outlook for currency markets
changes, so your policy needs to be
adjusted accordingly.
6 www.xe.com/businessNINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
3
Focusing only on the rate
For any business that needs to a stand-out exchange rate by a elsewhere – but do so on the basis
choose a foreign exchange service, provider, are you missing out on of value rather than price. What
for day-to-day transactions or for something else? That might be do you need from your foreign
more strategic planning over time, the level of service your business exchange service in addition to
the exchange rates it offers are the requires, for example, or basic competitive rates? Are the rates
obvious place to look. Why wouldn’t support services – how quickly quoted open and transparent so
you choose the provider that will your provider intervene if a that you always have a clear view of
offers the best possible rate for payment goes wrong, say what you’re paying, after charges?
your money? for example?
In practice, foreign exchange
“Businesses that providers offer all sorts of
additional value. You may need,
spend all their time say, an online service tailored to
focused narrowly your business’s specific needs, with
authorisation from different people
on watching rates for different types of transaction.
may miss the You may need the fastest possible
service to ensure your payment
bigger picture.” windows are longer.
It’s also important to understand Equally, foreign exchange services
that rate comparisons can be can watch the currency markets
misleading. Foreign exchange for you. If your business is pre-
markets move so quickly that occupied with trying to time its
unless you’re comparing rates foreign exchange transactions to
The answer is that while rate is at a given moment, you may not get the best rate possible, look
important, it’s not the only factor be comparing like with like. A for a service that offers rate alerts
that will have an impact on your provider that looks competitive – notification that the rate has
business’s exposure to currency now compared to the rate you were hit a particular level – or market
risk. Moreover, businesses that offered by one of its rivals orders – where your transaction
spend all their time focused two hours ago may not really automatically goes in at that price.
narrowly on watching rates may be so attractive.
miss the bigger picture.
It certainly makes sense to shop
Start from the healthily sceptical around – too many businesses
view that if something is too good accept the sub-standard services
to be true, it almost certainly is. offered by their FX provider just
In other words, if you’re offered because they’ve never looked
www.xe.com/business 7NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
4
Not understanding the breadth of
products available to your business
Many businesses aren’t aware of There are a variety of foreign It may be, of course, that hedging
the full range of foreign exchange exchange tools you can use to do proves to have been unnecessary.
risk management options. They exactly that, but consider forward In our example, if sterling doesn’t
may think, for example, that any contracts as one example. With fall against the euro, or even
strategy other than buying the these transactions, you’re simply rises, the grocer might feel it was
required currencies at today’s arranging to buy a certain amount a mistake to lock into a set rate
rates – the spot price – is getting of currency at a set price in the in advance. But that would be to
into the realms of currency future. So, for example, a chain fall back into a mindset of seeing
market speculation. of grocers might be due to pay a hedging as speculation rather than
€10,000 bill to overseas suppliers in an insurance policy. You don’t, for
“The idea of currency a month’s time. A forward contract example, rue having paid for home
specifying today what it will pay in insurance when you get to the end
hedging is not to sterling for that €10,000 eliminates of the year without your house
second-guess how the risk that the pound falls in
value over the next few weeks so
having burned down.
foreign exchange that the grocer has to pay more This is not to suggest that
than expected. This isn’t currency hedging is the right strategy for all
markets might move speculation or an attempt to businesses – some may take the
in the days and second-guess the markets – it’s an view that the size of their currency
insurance policy. exposure doesn’t require this sort
weeks ahead; rather, of insurance. Even so, don’t assume
the aim is to insure that a foreign exchange provider
can’t do more to help your business
the business against with its currency needs.
the possibility of
adverse movements.”
Hedging, in particular, is widely
misunderstood – and therefore
rejected. The idea of currency
hedging is not to second-guess how
foreign exchange markets might
move in the days and weeks ahead;
rather, the aim is to insure the
business against the possibility of
adverse movements.
8 www.xe.com/businessNINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
5
Getting overwhelmed by
complex administration
For businesses with regular foreign
exchange needs, it’s all too easy
for the daily detail of handling
payments and other transactions
to obscure the bigger picture. You
may be so busy processing foreign
exchange that you can’t take a more
strategic view of the business’s
overall exposure; or your problem
may be that such transactions are
taking up time that would be more
productively spent on other issues.
It may even be that manual data
entry processes are vulnerable
to human error, causing you
unnecessary delay.
proactive decision-making and
“It’s all too easy Your currency exchange provider plan ahead. Larger organisations
should be able to help you solve can be especially vulnerable to
for the daily this problem. For example, it should this mistake.
detail of handling be able to create a system that
grants some users administrator However, businesses that have
payments and other rights – to do the processing work – never looked beyond their current
transactions to while reserving payment authority provider for foreign exchange, or
shopped around for an alternative
for specific individuals. They should
obscure the be able to offer straight-forward partner, may not even be aware
that there are other options. If
bigger picture.” processing that is secure and
reliable. And they should be able to you’re getting bogged down in the
help you trace delayed payments. detail of currency transactions,
This can often be a particular talk to alternative providers about
issue for growing SMEs, where the how they might help you function
business owner or founder naturally If you don’t have access to these more effectively.
wants to continue to monitor sort of services, managing foreign
overseas payments carefully but exchange can rapidly become a
no longer has time to deal with the time-consuming and expensive
mounting administrative burden. task for your business. It therefore
They need to retain responsibility for becomes even more difficult to take
authorising payments – particularly a strategic view of your activities
for larger sums – but they don’t have in order to manage risk, enable
time to do all of the processing.
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6
Not having a handle on compliance
Regulatory compliance should Your foreign exchange provider
be an absolute priority for any should be able to help you handle
organisation involved in currency these potentially confusing
transactions with overseas variations while remaining
customers and suppliers. You will compliant. For example, are online
need robust processes in place systems in place to automate data
to generate the information your entry – and to quickly identify
foreign exchange providers will mistakes or missing information
legally require in order to transact that may get in the way of
on your behalf. If you don’t, there’s your payments being made on
a danger payments may not time? Does your provider offer
go through on time, potentially simple, jargon-free advice on the
jeopardising relationships with information you require from
suppliers and customers, or even foreign counterparties and where to
adversely affecting your supply find it? Can it store payment details
chain. Your cash flow may also on the system so you don’t have to
be damaged. keep re-entering them each time a
all the parties they deal with, transaction is due?
including the foreign parties
“Protect your cash with which your business may If you’re not sure how to
flow, supplier have contact. Any hold-ups in the
verification process may delay your
get compliance right, speak
to a specialist foreign
and customer transaction going ahead. exchange provider.
relationships and You should also be careful not
supply chain.” to get caught out by unfamiliar
overseas banking details. While
Despite this imperative, regulatory bank identifiers in the UK are
delay is a common problem standardised around account
in foreign exchange. Financial numbers and sort codes, the
institutions must comply with strict equivalents vary from country
regulation as they conduct foreign to country internationally, and
exchange transactions on behalf of may require you to deal with
their customers. Under know-your- data such as international bank
customer (KYC) and anti-money account numbers (IBANs) and bank
laundering (AML) rules, they are identifier codes (BICs).
required to verify the identities of
10 www.xe.com/businessNINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
7
Poor internal communication
Internal communication issues
can get in the way of good
foreign exchange practice and
risk management, especially as
organisations get larger. Business
functions that operate in silos and
rarely talk to one another may
have little idea about how their
particular currency market
exposures fit into the overall
exposure of the company.
In the worst cases, businesses that
may even be taking autonomous
decisions about transactions and
risk management that don’t make area of the company or another you deal with problems as quickly
sense in the context of the business cause a real problem. as possible. Do you know, in person,
as a whole. Supply chain managers, Working with your foreign exchange who you can expect to deal with
for example, may be hedging out service provider to develop a robust – is there a single person or team
the risk of higher import prices risk management policy is the responsible for your account, for
without understanding what best way to counter this danger. example? Are you being provided
revenues the sales department is Once you better understand with the information you need
expecting to book from overseas. every aspect of your business’s about foreign exchange markets to
currency exposure, you’ll be able to make proactive decisions?
implement the right processes for
“understand every dealing with it on a holistic basis – “Are you being
aspect of your and by embedding these processes
provided with
in every part of the business, you’ll
business’s currency eliminate the danger of any single the information
exposure” function causing a problem.
you need about
Such communication breakdowns
Finally, you should think about how
easy – or not – it is to communicate
foreign exchange
make it very difficult for your
business to approach foreign
with your foreign exchange markets to make
provider itself on an ongoing basis.
exchange holistically – to get the
Online systems make day-to-day proactive decisions?”
best deal possible on rate and
operations quicker and simpler for
service, and to manage risk as
most businesses, but there will also
effectively as possible. If your
be times when you need additional
business is suffering with this issue,
help. Look for a provider that offers
it’s important to take action quickly,
a phone-based service that helps
before risks lurking unseen in one
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8
Working with a foreign exchange
provider stuck in rigid processes
One problem that commonly stands
in the way of businesses seeking
to ensure they’re managing
currency risk effectively and
securing the best value from
transactions is that their foreign
exchange provider doesn’t offer
sufficiently flexible terms.
This can be a particular issue for
companies for which a hedging
strategy might be appropriate
but which are put off by the need
to make payments in advance or
provide margin for their forward
positions. Some foreign exchange
providers are able to offer more
flexible credit terms than others in
such situations.
Without such flexibility, a hedging
strategy may be considered out of
reach for some businesses, even
if putting such a strategy in place seek to make payments quickly should be determined by business
would substantially reduce the to different parties in different needs, rather than defined by the
company’s exposure to foreign markets, while ensuring you have limitations and inflexibilities of
currency risk. In other cases, as long as possible to complete the your foreign exchange provider.
businesses may be able to take transaction. Look for a provider that Talk to different providers about
on hedging positions, but not on is able to configure their service to what they might be able to offer.
the terms that would suit their meet your particular needs.
individual circumstances best. Give your business
In the end, the key here is to give
Consider other types of flexibility your business as much room as much room for
too. For example, does your foreign for manoeuvre as possible. Your manoeuvre
exchange provider offer access to approach to foreign exchange,
different types of payment service? whether day-to-day transactions as possible.
This may be important as you or longer-term risk management,
12 www.xe.com/businessNINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
9
Not shopping around
“Focusing on foreign
exchange can deliver a
broad range of benefits,
from enhanced
value to better risk
management.”
The lesson of this guide is that
focusing on foreign exchange can need. It’s easy to stay with your What you need is a provider that
deliver a broad range of benefits, bank – and you certainly want the takes the time to understand your
from enhanced value to better risk security of dealing with a trusted business’s specific needs, rather
management. The key to securing provider – but it may not be able than offering a generic service. The
those benefits is to work with a to offer the depth and breadth of competitiveness of the exchange
foreign exchange provider that currency services on offer from rates it offers will, of course, be
understands your needs and is a specialist provider which does a factor in your search, but this
able to help you to achieve your nothing but foreign exchange. shouldn’t be the only consideration.
goals. It may be that your current Rather, you need a provider able
foreign exchange provider is This is not to suggest you should to develop a bespoke solution that
capable of doing that, but until you fall for rival providers’ hype. If a meets all your foreign exchange
review what else is available, you rate sounds too good to be true, for needs – including helping you to
won’t know whether it is possible example, it almost certainly is. Also manage future risk more effectively.
to do better. be sceptical about any provider that Don’t settle for anything less.
encourages you to speculate in the
Not shopping around for foreign currency markets or to persuade
exchange services is therefore you that it can help you second
a huge mistake. You may be guess exchange rate movements. It
denied better rates, miss out on might sound counter-intuitive, but
service opportunities you didn’t the ideal hedging position is one
know existed, and fall short of that doesn’t deliver a benefit – in
the strategic approach to foreign other words, you take out insurance
exchange required if policies and against the worst, but hope for the
practices are to reflect the realities best, that the currency markets
of your trading environment. don’t move against you. In reality,
Don’t assume your bank will deliver even a successful hedge only buys
the level and quality of service you you some time.
www.xe.com/business 13NINE FOREIGN EXCHANGE MISTAKES YOUR BUSINESS SHOULD AVOID
10
About XE
Empowering International Business By working with XE Business Services, you benefit from:
At XE, we live currencies.
ducation and insight. Our proactive market
E
We provide a comprehensive range of currency services insight helps our clients plan for any event that
and products, including our Currency Converter, Market may impact their FX exposures.
Analysis, Currency Data API and quick, easy and secure
Money Transfers for individuals and businesses. redit terms. We work with you to overcome
C
potential liquidity constraints if you use forwards or
In 2018, we helped nearly 300 million people access FX Options. We can offer enhanced credit facilities
information about the currencies that matter to of up to three years in length over both initial and
them,and over 350,000 people used us to send money variation margins (subject to approval).
overseas. Thousands of businesses relied on us for
information about the currency markets, advice on trategic support. We support our clients to
S
managing their foreign exchange risk and trusted us with execute informed hedging strategies, taking the
their business-critical payments. emotion out of hedging and providing structure
and clarity.
Part of Euronet Worldwide
XE is part of Euronet Worldwide (EWI), a Nasdaq listed xpertise. Our dealing team is experienced in
E
global provider of electronic and transaction processing supporting businesses with their FX strategies
solutions, with a market cap of approximately $7.5bn. in a number of sectors and jurisdictions, guiding
them to make hedging decisions that are right
for their business.
XE Business Services
International Payments and FX risk management form the Speed. Quick and efficient international payments.
world’s trusted currency authority.
ecurity. Our parent company, Euronet Worldwide,
S
Staying ahead of the competition is hard enough without has a $7.5bn market capitalization, meaning you
having to deal with the complexities of foreign exchange. have the peace of mind that your funds are in safe
XE can support you to save both time and money, so and secure hands.
that you can get on with what you’re good at – running
your business. lexibility. Draw down funds early, roll contracts
F
forward or simply settle the cash difference
Our solutions can give you reassurance in an uncertain depending on the unique requirements of
world, and empower your business to make the your business.
right decisions.
Spot Contracts Forward Contracts Market Orders Cash Solutions
FX Risk Mass Payment FX Options &
Management & Advisory Solutions Structured FX Products
How does FX volatility impact your bottom line?
For more information, and to discuss your own situation and FX exposures in more detail,
please contact a member of our team on +44(0) 1753 752 626
business.eu@xe.com
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HiFX Europe Limited, trading as XE is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration 462444, for
the provision of payment services. HiFX is also a registered MSB with HM Revenue & Customs. Registration number 12131222. This communication is for
information purposes only and is not intended as a solicitation for funds or a recommendation to trade. HiFX accepts no liability whatsoever for any loss or
damages suffered through any act or omission taken as a result of reading or interpreting any of the above information. HiFX is a limited company registered
in England and Wales. Registered number: 3517451. Registered office: Maxis 1, Western Road, Bracknell, Berkshire RG12 1RT.
www.xe.com/business 15XE, Maxis 1, Western Road, Bracknell, Berkshire, RG12 1RT Tel: +44(0)1753 752 626 www.xe.com/business HiFX Europe Limited, trading as XE is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration 462444, for the provision of payment services. Registered office: Maxis 1, Western Road, Bracknell, Berkshire RG12 1RT
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