Key Takeaways:
Due to various macroeconomic factors in recent years, ranging from the Covid pandemic to the ongoing conflict in the Ukraine to elections in the UK and the US, it's become more important than ever to be aware of fluctuations in the foreign exchange market. For businesses of all shapes and sizes, it's apparent that exploring available options to mitigate risks and protect business finances is vital, especially if organisations trades or makes payment internationally.
Read on to learn more about what rate volatility is and how Equals Money can help you and your business mitigate risks using currency hedging.
Exchange rate volatility is the term used to describe the change of exchange rate between a common currency pair within a short period of time.
Volatile exchange rates can substantially affect the value of a company or business’ assets denominated in foreign currencies, which in turn can have a serious impact on an organisation's bottom line or potential profit.
Even if a company doesn't directly deal with international markets (for example, by exporting their products), if they operate within a globally competitive industry, changes in exchange rates over time can still affect operating profits.
Currency hedging is a strategy mechanism used by businesses and financial service providers to mitigate risk and protect against potential losses that can result from fluctuations in exchange rates.
When conducting business or investing across borders, currency values can shift, affecting the value of transactions or investments. Hedging involves using financial instruments such as forward contracts, options, or swaps to lock in exchange rates or protect against adverse price fluctuations. By locking in rates at the time for a date in future, currency hedging can help limit the impact of cross-border currency exchange risk. This can help provide some certainty during times of market turbulence and volatility.
As mentioned, hedging can utilise various tools, agreements, and contracts. It can be a complicated process - that’s where we come in.
Currency hedging is used by various entities, including multi-national corporations, exporters and importers, and any organisation that may deal with international markets or operate within global industries that may be affected by a degree of volatility.
For instance, a British import company expecting to receive payments in euros in the future might enter into a forward contract to convert those euros to pounds at a predetermined rate. This ensures that if the euro weakens against sterling, the British company still receives a favourable exchange rate. Conversely, if the euro strengthens, the company may not benefit from the increase, but the hedging has effectively mitigated the risk of loss.
With an Equals Money account, there are a range of services, financial instruments, and payment options at your disposal to mitigate risk when dealing with foreign exchange, such as forward contracts, limit orders, market monitoring, and the Equals Money Rate Watch. Your own dedicated account manager will guide you through all your options so you can make the best decision for your business.
What is a forward contract?
A financial instrument used for currency hedging, a forward contract is an agreement made in dealing with foreign exchange that guarantees, or “locks-in” an exchange rate for the sale or purchase of a specified currency for a future date.
When trading internationally for your business, a forward contract with Equals Money can mitigate the risk surrounding cross-border transactions. When the contract is agreed, you are guaranteed the specified exchange rate for the agreed time of payment, which will have been declared when the contract was made.
You are committed to the rate booked, regardless any rate fluctuations or price movements after the fact. This means that should the rate move further in your favour by the time it comes to settling the transaction, you’ll still receive the same agreed exchange rate, presenting a possible drawback when choosing a forward contract.
However, the stability, certainty, and commitment offered by a forward contract (which allows companies to apply exact, specified exchange rates to their business operations such as future cash flows or future income for overseas projects) outweighs this potential disadvantage.
What is a limit order?
A limit order is an instruction to buy or sell currency at a specific exchange rate or better. This type of order gives businesses control over the price at which a payment will occur, providing protection against unfavourable price movements.
A limit order with Equals Money allows you to target a desired exchange rate and set up an automated and immediate payment conditional to that rate. This can be set up over the phone with one of our currency specialists, and if your target rate is achieved, we’ll make your cross-border payment then and there. As a result, you won’t miss out if the rate moves overnight and can get on with your day without worrying about rate fluctuations affecting the cost of your payments.
However, there is no guarantee that the order will be filled if the market does not reach the specified limit price, which could result in a missed trading opportunity.
Exchange rates are always moving due to a variety of macroeconomic factors that range from political events to world issues to the release of economic data. Due to this, currency values shift daily, and this in turn directly affects the cost of making an international payment.
By signing up to daily market reporting and Currency News from Equals Money, you can get expert insights into the financial markets each morning. Keep up to date with the financial markets as a whole and receive daily reports delivered straight to your inbox.
A key benefit of being with a currency specialist company like Equals Money is that you’ll have a dedicated account manager to monitor the exchange rates on your behalf and instantly alert you if there are any movements in your relevant currency pairs, ensuring you’ll always be up to date on the information that matters to your business.
Timing is crucial, and arguably the most important factor when it comes to getting a favourable exchange rate. With Equals Money, you can sign up to our Rate Watch service and choose a target rate for the currency of your choosing.
With this service, you’ll be notified by a member of our team when the currency reaches your desired level. You can then decide whether to purchase your currency at this potentially favourable rate and take advantage of any upturns or price movements in the market without needing to constantly check the moving rate. With Rate Watch, you can focus on the day-to-day tasks of managing your business.
Rate volatility can affect your business whether you trade internationally or not, therefore it’s important to not only be aware of it, but minimise the risks it can pose. These are just some of the many solutions offered by Equals Money, with bespoke offerings available from our in-house currency experts.
Want to learn more about how Equals Money can help your business with currency hedging and international payments? Get in touch with a member of our team today.
1Equals Money can only offer forward contracts to facilitate payments for goods and services
This publication is intended for general information purposes only and should not be construed as financial, legal, tax, or other professional advice from Equals Money PLC or its subsidiaries and affiliates.
It is recommended to seek advice from a financial advisor, expert, or other professional. We do not make any representations, warranties, or guarantees, whether expressed or implied, regarding the accuracy, or completeness of the content in the publication.
