Thank you for reading AJP Currency Solutions Ltds 2nd blog.
What this year has highlighted is that currencies can fluctuate dramatically on events that may or may not happen, it is totally understandable when something happens in the world that it impacts on financial markets, 9/11 showed that. At the start of the year Sterling to Euro hovered around 1.28 and then we had the Greek election and the unknowns that the results from that gave us weakened the Euro, so much so that by the middle of March the Euro had eclipsed 1.41 against the pound giving a 10% movement in just over 3 months and here we are in May and still no closer to resolution between Greece and the rest of Europe.
The UK General Election is upon us and the uncertainty caused by seemingly no outright favourite and another coalition/agreement seeming to be inevitable has seen the pound slide to 1.35 against the Euro and this is before the votes are cast. If the wrangling goes on for too long how will the uncertainty impact on the markets?
The reason for this blog?
Well, for businesses in particular, setting budgets for costs and sales can be tough enough, none of us know for sure how our business is going to fare, we put a business plan together and we need targets else our businesses do not have objectives and direction, when you throw currency exchange into the mix it makes the job even harder, we can look at historical rates and take an average but these sometimes, unforeseen global occurrences can make a mockery of averages.
Let’s take the figures above as an example, if you were a business importing from the Eurozone you would have been quite happy to see your costs go down by roughly 10% in 3 months, however if your business is exporting to the Eurozone your clients have seen an increase of 10% on their costs of buying sterling to pay their invoices, maybe enough for them to look elsewhere, but then what happens after the UK election, a dramatic drop in the value of the pound against the Euro could see roles reversed.
There are ways to help plan budgets, costs and the currency companies we work with can help greatly by cutting out the highs and lows of currency fluctuation.
Forward contracts can be set up when a price is at an acceptable rate, for example if you were buying Euros throughout the year, maybe at the start of the year the business had budgeted on getting 1.30 to the pound as an average through the year, so when in March it had gone above 1.40, it would have been prudent to book on a forward contract, obviously there is no guarantee that the rate will not continue to rise but a business has to sometimes make decisions on what is a good deal and you cannot put a price on peace of mind, for clients who are exporting and there is competition you could always offer to invoice in the currency of your client, saving them the concerns of currency fluctuation, again when a price is reached which fits within the business budget and plans then fix this price with a forward contract.
How does a forward contract work?
A forward contract is put in place fixing a price and an amount of currency over a given time period, normally a currency company will require a 10% deposit which will be used as part of the final currency exchange.
An example would be
Buying 100,000 Euros at a fixed price of 1.38 for 12 months.
For a UK business this would mean that they know that buying those Euros will cost £72,463.79 and this will not change. A deposit of the equivalent of 10,000 Euros would be held by the currency company and used as part of the last transaction and as the companies do not charge fees for transferring money there is nothing more to pay. The rate is set for 12 months and there can be as many transfers as needed during this time using the total up. For a business that expects to have to buy 200,000 Euros in the year this would be perfect, book 100,000 Euros on a forward contract and leave the other 100,000 as flexible. If the rate has dropped below 1.38 then use the forward contract and if it goes above 1.38 use the daily rate, it gives a level of protection against currency fluctuations but still gives flexibility when the rate is favourable. The important points to remember with this type of contract is that it needs to be used by the end of the fixed period, the fixed period can be anything from a few weeks up to 2 years. It can be a very useful tool for businesses but it is not for everyone, businesses with a good understanding of their requirements it is perfect to use as part of their financial planning for businesses unsure of their requirements it can be difficult to guarantee that the contract will be used before the date expires.
This is where we come in, we are an Independent Consultancy we will talk through with you how your business works, plans and targets and we will see how we and a currency company can help add value to your business.
For further information please contact us at