Guest Article: What if your costs increased by over 10%?

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This week, we are delighted to have a guest post from
Edward Hardy, Corporate Market Analyst of foreign exchange specialists World First.

A UK-based company who imports from Europe by paying suppliers in euros has seen the rate fall sharply over the past twelve months, falling from a high of 1.44 to below 1.18 – a fall of over 18%.

Even if we assume the company had established a budget rate for the year at 1.35 and they’re now buying at the spot rate, they’re paying over 12% more for their euros than their budgets had suggested on January 1st.

What can you do?

If your business imports from or exports to businesses and individuals abroad, your firm will be exposed to currency fluctuations. Contact World First and we can review your foreign currency exposure. Our dealing team can help identify risks to your business and help to build a sensible strategy to manage what your business needs.

What products are available?
You can approach your currency risk in a number of different ways; from spreading out the purchasing of currency over an extended period to using risk management and hedging methods to curtail your risk exposure to the FX market itself.

World First specialize in the creation and execution of these strategies for our clients and we use a variety of different products and methods to achieve this:

Forward contract – A forward contract allows you to buy or sell an amount of currency at or before a set time in the future. It allows you to effectively pre-purchase your currency by paying deposit ahead of time.

The rate for a forward contract may differ from the spot rate as the market calculates a forward rate depending on the difference between the interest rates between the two currencies.

Orders for spot – An order allows your company to agree to transact an amount of currency for immediate delivery (within 2 working days) if you can get a particular rate. These can either be a rate better than where the market is trading (to try and catch the rate when it moves in your favour) or worse than where the market is trading (to ensure you have a worst case rate).

Orders for forwards – This works in the same way as an order for spot and, if your selected rate is achieved, would then automatically create a forward contract.

Should your company have a risk management strategy?
If your company raises a proportion of your revenues or pays a proportion of your costs in a foreign currency that is significant to your business, in our opinion you should have a solid risk management strategy in place. Strategies will vary in size and complexity according to the size and complexity of your business, but products are available that could help you approach your exposure in a sensible and measured manner.

Ibérica Restaurants is a group of restaurants with seven locations in the UK. They offer an ever-evolving menu of Spanish food in contemporary Iberian surroundings.

They have been a client of World First’s since 2010 and use World First to buy euros which are paid to suppliers, typically in Spain. These payments can be for traditional furniture, artisan meats, cheeses, wines, and much more.

Until recently they typically used forward contracts to buy euros three months ahead of time. A couple of weeks before the EU Referendum Ian, their Account Manager, reached out to discuss how potential moves in the market could affect their business.

After a productive discussion which touched on Ibérica’s wish not to pass on higher costs to customers due to instability (which could have been a major factor from a lower GBP/EUR rate), they booked a six month forward contract.

Sarah Winter, their Finance Director, commented “Ibérica books forward contracts in order to stabilise our menu prices. In this case we recognised that it could be beneficial to buy more currency further forward due to the looming uncertainty heading into the referendum vote. We wanted to de-risk our menu to ensure our customers continue to receive the best value for money which we can only do if prices are not volatile, particularly in the short term.”

Following the referendum vote, the GBP/EUR rate fell sharply, meaning Ibérica’s forward contract allowed them to purchase euros at a beneficial rate for six months from the beginning of the contract. The key to this strategy was the decision to book a forward contract for greater certainty and so that they knew that the current prices they offer clients could remain stable for some time.

To find out more about how World First could help you manage your currency needs, give one of our friendly specialists a call today on 020 3432 6984 or visit worldfirst.com.

About World First
World First is here to help you make international payments faster, cheaper and easier. With better exchange rates than the banks, you could make significant savings. Plus there are a range of ways in which you can make a payment. World First specialises in assisting private and corporate clients with foreign exchange transactions. If you’d like to know more on how to get cheaper faster currency transfers, click here for more information.

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