Foreign exchange exposure refers to the risk a company undertakes when making financial transactions in foreign currencies. All currencies can experience periods of high volatility which can adversely affect profit margins if suitable strategies are not in place to protect cash flow from sudden currency fluctuations. Exchange rate risk can usually be managed through effective, preemptive hedging.
When supply chain payments or critical accounts are based in foreign currencies, companies may choose to employ a targeted currency strategy to minimise foreign exchange exposure. These strategies usually involve contracts that allow companies to lock in an exchange rate for an extended period of time, often up to one to two years.
How can your business limit foreign exchange exposure?
OFX provides a number of risk management tools to help businesses limit their foreign exchange risk. We cover the fundamentals of these tools below, but put simply, no two businesses are the same in terms of their goals or tolerance to risk. Our dedicated team of currency and product specialists are on hand to support your business in building a strategy tailored to your needs.
Spot transfers
Spot transfers are the most basic risk management tool used in foreign exchange. These transfer types specify the terms of an exchange of two currencies between an end user and their financial institution.
In any foreign exchange transfer, including spot transfers, a number of variables need to be agreed upon. These are:
- The currencies bought and sold. (Every forex transfer involves two currencies, one that is purchased and one that is sold).
- The amount of currency to be transacted.
- The date when the transfer matures.
- The rate of exchange at which the transaction will occur.
Forward Exchange Contract (FEC)
Buy now, pay later. If you need to lock in a rate but aren’t ready to transfer now, a Forward Exchange Contract (FEC) may be for you.
A FEC allows you to use today’s currency rate for a future transfer. So, for example, if your business has a fixed currency budget, or sensitive pricing that depends on the day’s rate of exchange, a FEC can help you plan with more certainty, protecting your business from sudden market shifts.
The benefits of a FEC include:
- Eliminating the worry of future market movements for up to 12 months.
- Can be rolled into other products like spot transfers and limit orders, meaning you can maximise your savings as you realise favourable market movements.
How Zoratto Enterprises saves with Forward Exchange Contracts
Andrew Zoratto, Operations Manager at Zoratto Enterprises
Limit Orders
Another popular option for managing market risk is a Limit Order, where you can set a target rate (if you’re someone who likes to stay familiar with the markets on the regular), and then our experts monitor the market for you.
This way, if the rate hits that target, you’ll be notified via phone or email to make your transfer. If you don’t want to transfer at that point, you can always cancel the order with no cancellation fees.
This gives you the benefit of:
- Selecting a rate that works for you or your business, and provide peace of mind if markets become unpredictable (think: Brexit updates, or the US-China trade war).
- Can also be used in conjunction with other products like Spot transfers and FECs to take full advantage of favourable market movements.
Let’s compare:
| Spot Transfer | Limit Order | FEC |
|---|---|---|
| Transfers money as a single exchange | Allows you to lock in a target rate and we market-monitor for you | Lock in a favourable rate and transfer later |
| Uses the rate secured at the time of transfer | Can cancel at anytime, or roll into an FEC | Can be used for up to 12 months |
| Great for everyday transfers and risk management | Helps mitigate risk in uncertain markets | Good for sensitive pricing schedules |
Payments to overseas suppliers or staff may be primarily affected by exchange rate valuations, but bank fees can also chip away at profit margins. That’s why many small businesses have chosen specialist money transfer providers to make faster, cheaper and more convenient overseas payments.
For companies who sell primarily via online marketplaces, the ability to access international marketplaces and be profitable in those markets may depend on retaining control over when to bring revenue home from overseas. A specialist money transfer provider like OFX allows online sellers to bring their profits home at better exchange rates and with less currency risk.
To learn more about how OFX can help your business reduce foreign exchange exposure, contact us today to get the savings and service you deserve.
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IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.