Top Tips for managing your company currency volatility

No matter how big your company is you probably have some exposure to currency movements. It may be obvious such as you having customers or costs outside your home market or less obvious in your subscriptions to various services you rely on.

Most smaller companies just accept this movement as part of day to day business, sometimes you win and sometimes you lose. However, recent market events have shown that currency movements can be significant and actually really impact your bottom line.

So as a smaller company what can you actually do?

You have a choice between fully hedging, partially or doing nothing. If you want certainty then you need to hedge and the best time, as they say, is always now! 

Doing nothing is a gamble basically and you could win or just as easily lose. Lots of people do this so you would not be alone. 

If you want some sort of certainty then you need to hedge to some extent. 

Unless you are looking to hedge 100s millions or billions then you will get charged quite a lot by banks. 

Some of this charge is because you present credit risk but frankly some is because banks can charge small companies a lot. Big people get better prices sadly, get over it!

Assuming you have completed basic hygiene eg. locking in any overseas subscriptions you have or cancelling things you don’t then you are left with a decision. 

You need to model your cash and then overlay some acceptable range you would be happy to tolerate eg 5% swing in GBPUSD is ok 10% is not. It is up to you what you will accept. If you have multi currency exposure you will need to do this together. Most UK companies will have exposure to USD and EUR at a minimum.

The only point to note here is the more certainty you want then the more you are likely to have to pay. Nothing comes for free.

You then need to call your bank and speak to their corporate FX team or potentially their treasury FX desk. It may be called something else but they will have a function that does this. It is a big money maker for banks.  

Explain what you are looking to do and see what they suggest. 

If you are able to get a few different ideas and quotes you will be able to create some competition. Ask them to break down their charges line by line. They will want to give you an "all in" rate which is bank code for as much as they can charge you. 

It would be worth speaking to a few CFOs in your sector to see what they do. I imagine there are also FX consultants and boutiques out there that it could be worth talking to. Like all boutiques and consultants, some will be excellent but there will be a fair number of clowns. So seek a recommendation if you can.

The most extreme strategy would be to buy a Forward Outright. This locks in the rate and obliges you to do a conversion at a certain point in the future for a certain amount. eg you have to SELL EUR 10m for GBP in 12 months at a certain rate. It is worth noting that you have to do this if you lock into this. If rates go in your favour you still have to do it even if you didn't want to.

In order to do this you would need to post margin (usually cash unless you have some gold bars handy) to the bank to help them cover their credit charges eg if you don't honour your deal down the line and run off to Brazil.

This strategy could be expensive and is not that flexible if you wish to alter the amounts or timeframe. You could ask them to give you the option to alter the date of exchange or the amounts but the more freedom you want, the more you will have to pay. 

At the other end you could buy an option or options. It sounds terrifying but is not. This gives you the right to do the currency conversion but not the obligation. To do this you will have to pay some money to buy the option, the premium. The advantage to this is if your rates go in your favour the most you can lose is the price of the premium. Think of it a bit like insurance. The most you pay is the premium.

The price of the premium will depend on a number of things but the main ones you can control are the exchange rate you want, the amount you want to transact and timeframe. If you are happy to accept some currency movement and lock in an exchange that is some way from the rate quoted today, then it will be cheaper for you. 

For most smaller companies then accepting the fact that you are happy to wear some FX downside (and upside) but lock in some protection against a massive downside event will probably be enough. It's a bit of a boring spreadsheet exercise at its core with various scenarios planned, there are probably tools to help you but excel is usually good enough to give you a reasonable answer. You want to make sure you have enough insurance to stop your company blowing up without spending so much money that you don't actually end up making any money. 

It's a really interesting and complex problem and one people devote their lives to solving. It is worth investing some time to understand your options and find some good people to help you. There are good people out there. 

Good luck!