A different approach to foreign exchange

If you run a business enterprise which involves any international monetary transactions, you’ll already be well aware of the extent to which this can cause problems.

Overall, there are two basic approaches to this; to hedge currencies or not to hedge (or to partially hedge obviously). This is easier for very large organisations with long contracts and big finance teams where hedging can sometimes be built into contracts – though it’s more common for both organisations to organise their own hedging arrangements. Overall – such organisations have to take life extremely seriously as they deal with multi-million pound contracts and where even relatively small fluctuations across currencies can make a huge difference to the bottom line.

Smaller organisations with short term contracts may decide to be a little more cavalier as long as the contract isn’t “life-threatening” in terms of its overall size and importance. In other words – if it’s relatively small beer and/or short-term, small organisations often decide to laissez faire; winning some and losing some.

One way around all this, though, if you want to hedge currencies effectively without any big capital outlay – is to spread-bet the differences in such a way that you’re compensated if the rate moves against you. This is, of course, hedging by any other name, but it’s advantageous in that you don’t have to pay a huge amount as you’re gambling on the margins between the two currencies of relevance to any particular situation.

So, for example, with spread betting online at Tradefair, there are hundreds of different currency pairs available to trade; quite sufficient to cover virtually all possible trading needs to compensate for contractual agreements running against an enterprise’s best interests.

On the whole, it is generally a good idea to hedge forward any big foreign currency transactions. For example, you may have a regular need to pay overseas staff and/or suppliers, or to receive international payment for goods or services etc. In these cases, having the right kind of hedging arrangements in place will allow business owners to sleep a little better at night.

There are many ways around this of which the afore-mentioned spread-betting route is simply one. Just remember that no-one knows, ever, which way currencies are destined to move. The foreign currency exchange market is by far the largest trading market in the world – and even the world’s best-known and most successful financial trades can get some of their biggest gambles spectacularly wrong.

We can’t all be like George Soros, the man who made a billion pounds in one day on black Wednesday betting against the Bank of England – but we can all take adequate preparations in case currency wobbles give our businesses the jitters.

And with foreign exchange dealing, and buying or selling the different currencies you’ll need to deal in, the important thing is in keeping things as simple as possible and minimising the costs to your business.

 

Posted by on Oct 15 2014. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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