In these challenging times prioritising which risks to manage first can itself be a daunting task. Thankfully in moneycorp Scotland we haven’t had any of our clients go out of business entirely but most are advising of supply chain issues, cash flow problems and a deluge of new rules and regulations to learn.
The recent lockdown-easing announcements are very welcome and it’s fair to say that over the past month I have noticed an increase in activity across our client base. We predominantly deal with importers and exporters and it is great to see this activity – it means businesses are starting to trade again.
Anyone who imports or exports has currency risk (regardless if you ‘only deal in GBP’) which needs to be managed carefully as a market event could wipe out margins in an instant. For example, we’ve seen GBPUSD move from 1.33 (December 2019) to 1.15 (March 2020). That is an 18% move across one quarter – or to put it another way – that differential means its costs £118,000 more to buy the same $1m depending on when you traded. Few businesses can absorb that kind of risk
Types of Trades
Previously, it was likely that a business with a future exposure (e.g. paying for goods in a few months’ time) would book forwards – securing a rate today, for delivery in the future. However, with the current uncertainty, it is hard to know exactly how and when to hedge as a change in the underlying requirement could see the business becomes over or under hedged. So it could be considered that a forward is too blunt an instrument to use here. Its works on the parameters set on day one but has no flexibility if things change.
Some businesses have gone to the other extreme and now only trade at spot leaving themselves open to the mercy of the market. This is risky though the balance here is flexibility – you can choose to buy/sell if you want to. If you must
buy or sell then you will get what the market gives.
The balance of the above is somewhere in between a forward and spot trading which can be achieved by using options. It’s important to note that not all institutions are permitted to sell option based products. Sometimes, those institutions stick to the products they can sell (e.g. spot and forward). But this may not be right for the business (a one-size-does-not-fit-all). It is important to consider the different solutions available. Spot / forward trading may too restrictive / risky and a blend of product (spot/forward/options) and strategy (tenor, size, flexibility, protection) tends to be a more sensible approach.
All importers and exporters face currency risk. Having a hedging strategy in place is essential. Don’t leave it to chance, consult with your current provider or with an expert who can help.
Contact Niall Handy, moneycorp Scotland on 0131 322 6558 or firstname.lastname@example.org