BLOG: Importers and Exporters – Managing Foreign Exchange Fluctuations
If you are a business that operates as an importer or an exporter, or maybe both, then you are going to need to ensure that you monitor foreign exchange (FX) fluctuations as they can have a big impact on your margins and profits. According to the Federation of Small Businesses, the United States (46%), Germany (38%) and France (36%) have been identified as the key target markets for UK based exporters and importers over next three years. As a result, this makes it particularly important to manage the effects of foreign currency movements.
One of the main risks for importers and exporters comes with buying goods and services in a country with a strong currency and then selling in a country with a weaker currency. Any significant movements in either direction could have severe implications for margins and profits.
Exchange Rates – What Influences Them?
If you want to protect your business against foreign exchange fluctuations then it is vital that you understand the factors that influence change. Therefore, you should actively track economic policies and data releases in those countries you utilise, and this would include interest rate changes and any alterations to the government. Along with this, increases in inflation and economic growth can also play a part. It is also imperative that activity at home is also monitored such as debt levels or interest rate changes.
Therefore, it can help to remember a simple rule whereby a strong pound is more favourable for importers while a weak pound benefit’s exporters. However, if you are dealing in both, then you need to make sure you identify the right balance.
Making Vital Payment Decisions
One of the key aspects of reducing the risk of foreign exchange fluctuations is how you make international payments and how you’re paid. An importer will need to determine if there are any products that can assist with managing their FX exposure, such as being able fix an exchange rate when purchasing from a supplier at a future forward date (Forward Contract), or immediately when the time comes to pay them (Spot Rate). For a UK exporter, they would need to decide if they will charge for goods in Pound Sterling or in the currency where the goods are being sent, and then managing the currency conversion locally.
Foreign Exchange Management
Once you have enhanced your knowledge on FX fluctuations and have implemented your payables and receivables, you will then need to identify a way of managing the currency conversion that works best.
You will need to:
- Seek out the right methods that enable you to mitigate FX movements
- Implement your chosen methods to every market that you trade with
- Identify the targeted rates or your aims for exchanging currencies
- Continually review your strategy to manage changes in market conditions.
It does not matter whether you are new to trading with other countries, or you are an established business that has been doing this for some time, Newbridge Foreign Exchange can help you. With the help of our team of experts, we can assist and support you in managing international transactions to maximise your margins, and reduce the risks involved in the currency markets.
Implementing Hedging Where Required
Importing or exporting comes with risks, and naturally you are going to need to do all you can to reduce these risks, as that can help you to minimise losses. It is possible to enter into financial contracts that protect from sudden changes in currency exchange rates, regardless of whether they are expected or unexpected, and these are known as hedging strategies.
The products we offer such as spot trading, booking forward contracts and limit orders are all part of the available hedging strategies open to you. Spot trading will involve the purchase or sale of a foreign currency on the spot. While forward contracts focus on fixing the exchange rate before settling at a later date. Further information on our products and services can be found here.