By Jamie Jemmeson ACSI, MSTA at Infinity International
Introducing the 4 questions you should start with…
Prime Minister Boris Johnson announced recently that non-essential shops in England can reopen from 15 June, rates of infection permitting. This now puts businesses in the unenviable place of second-guessing what sentiment and confidence may look like and the resulting sales and inventory requirements.
Business conditions remain fragile, despite a loosening of restrictions, it is unlikely to represent “business as usual” as we all continue to adapt to the ever-changing environment. With many still questioning whether a “second wave” emerges or not, makes it incredibly difficult to answer those FX hedging questions of “how much do we hedge; how long do we hedge for and when?”
The key question to answer and understand is “what is the purpose of business hedging” and may now be the time as we ease out of this unprecedented crisis to re-assess some previously held views/policies.
We have complied a few questions that you might wish to consider before executing a FX hedge or developing a hedging policy in these conditions. Over the next few weeks we will unpack each of the 4 questions, which are:
1. Understand your FX exposure
- Has your FX exposure changed – are you now using different suppliers/has your customer base changed focus geographically?
- Do you have line of sight on your currency requirements and what are the terms associated with your upcoming invoices?
2. What impact will hedging potentially have on the business?
- Can the business offset and reduce currency exposures internally?
- Can the business adjust its end pricing for the user and how does that impact demand?
- Is the business working from costed levels and are these flexible?
- What does FX hedging mean to the pricing of the end user and how will this affect your market share?
- What are your competitors doing?
- What impact will hedging have on the business’s working capital as it may need to be used for deposit and variation margin to enable you to place and maintain forward trades from your FX partners?
3. What hedging tools and what flexibility is right for the business?
- Consider the hedging instruments and tools that are available, investigate the benefits and considerations of each.
- Think about the percentage of the currency requirement that you want to hedge given the business conditions. You may want to consider the implications if your supply chain may let you down or if demand drops/does not pick up as expected.
- The uncertainty around the amount of currency required and the timings could determine how far forward you will hedge. This may come down to the reliability of delivery times of your goods and when payment is required.
4. What facilities are available to your business?
- What facilities are providers willing to offer your business in these uncertain times?
- Are you able to mange your currency exposure with your current framework or do you need to make other considerations?
- Are your facilities restrictive based on the current climate?
There is no silver bullet and there is not a one size fits all approach in terms of FX hedging, only what is right for the business at that current point in time. This is not an exhaustive list of questions but some you might consider for understanding “what is the purpose of hedging”.
What might have appeared to be a simple question at the beginning, has been unpacked into several points of consideration:
- Is the objective to ensure that FX hedge is preferential to your costed level?
- Is it to ensure you are competitive in your market space?
- Is it to gain an advantage over your competitors?
- Are you hedging to neutralise FX volatility?
Compound this with the uncertain path the UK is treading in terms of COVID-19 and trade talks, it can quickly become a complicated picture.
Next week we will deep dive into the 1st question: Can your business identify and understanding your FX exposure?
Hedging tools for business
If your business has currency exposure now or in the future, you may or may not have a strategy and range of tools you utilise to manage this. We understand that the world has become a little more uncertain and as we adapt, it will be necessary to review all areas of our businesses for efficiencies in cost and strategy.
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
Fill out the below form to recieve a free FX review.
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We’re here to cut through the clutter and industry jargon to provide you with relevant information so you can build your understanding of foreign exchange markets.
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).