Lots of factors influence an FX budget and every business is different. Here are some top tips from our OFXperts that you could think about.
1. Consider the transfer needs of your business
Let’s say you own an Australian business that needs to buy materials from the US worth US$100,000 each month and you want to limit the amount of risk you are taking in the current climate.
2. Evaluate your profit scenarios
Does the rate allow you to achieve a ‘Good’ profit margin?
If the current rates allow you to achieve a sufficient profit margin on your currency move, let’s say 10%, then locking in that rate with a Forward Contract while the opportunity is there could be the best move for your business.
Does the rate allow you to achieve an ‘Acceptable’ profit margin?
If at the current rate you can only achieve a 5% margin but ideally you want 10%, then consider using a Forward Contract for a partial amount of what you need to transfer each month. The level will depend on the risk you can take with the remaining amount due. The less flexibility you have to lose money, the more you want to protect. For the remainder, you can consider targeting a rate with a Limit Order which could help bring your profit margin back up if it triggers.
Does the rate give you ‘No’ profit margin?
If you are just breaking even at the current exchange rate for the transfers you need to make, then you could again look at fixing that rate for a period with a Forward Exchange Contract. This may sound counter-intuitive as you may prefer to take the risk on increasing your profit. But that also involves taking the risk of exchange rates turning against you, potentially wiping out your profits.
3. Reassess your position
For all of these scenarios, you could reassess your position after three months, for example. Global markets move quickly and the global economy could be having a different impact on currencies and your global money transfers in the future.
There’s no one size fits all approach. How often you should hedge depends on lots of factors like how much currency you need, when you need it, and your attitude towards risk. Hedging can be an excellent strategy to help businesses protect themselves from rates moving against them when they know they need to make a currency transaction at a set point, or even on a regular basis. But not every company will see the benefit. Our OFXperts can help you consider whether hedging is right for your business and the downside risks. Read more.