May 24, 2022
Shielding your business from a volatile market
Anyone who has ever dealt with foreign exchange would be well aware of just how vicious the market can be. There’s a reason the Rand is known as ‘predictably unpredictable’. Whether you are an entrepreneur just starting out, or a large corporate, managing your Foreign Exchange exposure is a key aspect and can protect your business from extreme market movements.
We understand that markets across the world are cut throat, driving businesses to squeeze margins in order to maintain their competitive edge. Then, lying outside the realm of your control, are external factors. Things you could never have planned for; load shedding, late night cabinet re-shuffles and of course a pandemic along with the subsequent harsh economic sanctions enacted by world governments. This, coupled with an already exceptionally difficult economic climate in South Africa could lead to catastrophe for your business.
You aren’t here for textbook definitions, so we’ll keep it short and sweet – hedging is a strategy used to mitigate risk and its potential downside. The only problem is that it is a bit of a double-edged sword as it also limits any potential upside should the currency move in your favour.
We can assist you with your hedging requirements by using FEC’s (Forward Exchange Contracts). The mechanics behind how a FEC rate is calculated may seem daunting at first but boils down to 2 core elements: the underlying interest rates of the currencies involved and the term of the contract. Fortunately, it’s not up to you to calculate this and you can depend on our expertise to guide you. The key take away is that the longer you take a FEC out for, the higher the premium paid on top of the spot rate.
So then, why would you want to use FEC’s to hedge your Foreign Exchange exposure if there is no upside? Well, hedging your exposure gives you certainty, more consistent pricing, and the ability to cost your goods ahead of time – something your end client values. Otherwise, it might just be worth it for the quality sleep you’ll be getting, knowing you aren’t at the mercy of the market and allowing you to focus on what matters most to you in your business.
Although your upside may be limited once you have entered into a FEC, it can still be used as a tool in order to gain a competitive advantage. Though we may not have a crystal ball to tell you when the best time is to trade, we are able to place orders in the market and watch market movements on your behalf so you can get the best possible rate.
At Currency Partners, we help our business clients by finding the right solution for their business while saving them money on the exchange rates and can free up valuable working capital by decreasing the amount of cash collateral required to hedge your orders and providing trade finance solutions to help you grow your business.
To speak to an expert in our specialist business team, email email@example.com or call us on +27 21 203 0081.
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