As many SMEs will know the key to good business is good planning. However with volatile exchange markets sometimes it is difficult to be confident in plans that are reliant on fluctuating markets. Despite this there are over 120,000 SMEs who participate in the import/export market with many seeing positive returns in foreign trading. In fact many SMEs see overseas trade as becoming ever more important in their overall strategy.
Despite the importance of overseas trading often SMEs find the risk of currency fluctuations quite daunting. The obvious reliance on exchange rates for receiving or paying for goods means that exchange rate fluctuations can affect the profitability of foreign trading. It is thus integral to understand how SMEs can manage these exchange fluctuations to ensure they are getting the most out of their overseas trades. So what is the best practice advice for managing Forex Risk? We look at 3 tips and explain the processes behind the two main types of foreign exchange trading – Spot Forex and Forward Contracts.
Sort out your exchange rate
Earlier this year research from a leading forex specialist found that SMEs who were trading overseas were losing out on potential savings just because they were using their bank’s rate of exchange. Whilst it might be tempting to use electronic transfer, your bank is unlikely to give the very best rate of exchange especially in comparison to a foreign exchange specialist. If you are the buyer then make sure you check the rates of several foreign exchange providers rather than relying on the rates of your bank. How much are you likely to save? If you are a buyer looking to trade over £100,000 in $ then it could mean the difference of around £3000.
- Set Your Exchange Rate
One of the best ways to avoid being burned by a fluctuating currency is to stop the currency… fluctuating! One method for doing this is by using a forward contract. A forward contract allows you to set an agreed rate with a foreign exchange trader for an amount that is to be paid at a set point in the future. That way you can ensure when you finalise payment the amount you agreed upon will retain the value regardless of when you send or receive the money.
Use a foreign exchange specialist – it’s what they are there for..!
If you need to send money a little bit more quickly than a forward contract then consider using "Spot Foreign Exchange Trading" (Spot FX). Essentially a spot trade will allow you to set an exchange rate 2 days in advance of payment. Again this avoids fluctuations in currency rates (over the course of a shorter time period) however it also gives you the advantage of settling transactions much faster than a forwards contract. The difference between a spot and a forward contract might seem obvious however knowing when to use one or the other is the more complicated part. A foreign exchange trader or specialist will be able to tell you exactly which forex method to use depending on your circumstances. They will also inform you of favourable fluctuations so you can make the most out of your foreign exchange transactions.
SMEs are looking to new ways of extending their reach and exploring new markets. By ensuring they are able to control their currency trades they can retain a profitable trade and ensure efficiency.
The important thing to remember about currency is the fact that it is always fluctuating – whilst the mechanisms are quite simple it requires great skill in order to benefit from fluctuating markets and protecting against risk. Think about the length between payments and also whether you consider whether your currency exchange is likely to be for the long game. If it is then consider agreeing a set rate by using a forex forward contract – this will protect profit margins for all future transactions where you are buying (or in fact selling) currency.
