By Jamie Jemmeson ACSI, MSTA at Infinity International
Last week, we published an article on “Points to Consider Before FX Hedging in COVID-19 Conditions”, where we highlighted some of the talking points when considering either implementing a new FX policy or adapting your current hedging strategy. We understand that perhaps now more than ever, risk management is a priority for businesses, which is why we will go into detail answering the 4 questions we posed, assisting business to prepare in the coming weeks and months as we re-enter the markets under COVID-19 conditions.
This week we are going to unpack Question 1 in more detail: Understanding your FX exposure.
Has your FX exposure changed?
Are you now using different suppliers/has your customer base changed focus geographically? Depending on the sector that your business operates, your FX exposure may have either decreased or increased dramatically as result of COVID-19.
- Before instructing any new FX hedges, you may consider whether demand has increased due to a sudden increase due to situational demand (for example toilet roll) and whether this demand is likely to continue once supply lines and/or trends change. How has this affected your currency requirements and what does this look like over the next few months?
- Have you changed where the business has sourced its goods? For example, have you adapted your supply chain, sourcing goods from Europe instead of Asia? Has this changed the currencies which you are exposed to? If yes, have you considered the underlying factors that drive the currency pair and the volatility associated?
- Have you received funding/financing that is not in your reporting currency, creating an additional FX exposure?
Do you have line of sight on your currency requirements and what are the terms associated with your upcoming invoices?
- When considering the line of sight of your currency requirement, based on the current conditions, could this increase, decrease or remain constant? What scenario will your hedge be based on and will you be able to reallocate these financial requirements if necessary; for example, if demand drops and you reduce the order with your manufacturer, can you utilise the excess currency on another order?
- It has often been said that in a crisis “cash is king”. With this mind, have your terms of business with suppliers changed or are you being asked to pay increased deposits to secure your purchase order? Due to the unknowns of COVID 19 and the resulting potential for supply chain disruption, what impact could this have on taking delivery of the goods and the subsequent FX hedge if a deposit is taken to settle the invoice?
Understanding your exposure in these times may be difficult as so many variables are still in play. Questions such as will there be a second wave, will lockdown happen again which in turn could impact your exposure.
Consider speaking to a foreign exchange specialist who will support you in developing a FX strategy which could help your business through these uncertain times.
Next week we will deep dive into the 2nd question: What impact will hedging potentially have on the business?
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Infinity International would be happy to offer a complimentary FX review of your current process to offer a fresh perspective and to highlight any areas that could be made more efficient. If you would like to organise a time for an exploratory conversation, please leave your details below.
The review would encapsulate:
- Strategy ideation to align FX risk management with your business objectives
- FX volatility assessment to understand the impact of a significant FX rate
- Credit terms to ensure efficiency for cashflow when hedging currency (subject to approval)
- FX pricing to determine your current cost of your current provider vs Infinity International rate
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This blog post is intended to provide you with information on the services Infinity International Limited (IIFX) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. IIFX is a company registered in England with registered number 06333730 and registered address at Third Floor, 24 Chiswell Street, London, United Kingdom, EC1Y 4YX. IIFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (FRN: 567835) for the provision of payment services. IIFX is authorised and regulated by the Financial Conduct Authority in the conduct of designated investment business (FRN: 671108).