Dynamic Business

Consider hedging
If you have good idea of the timing and size of future foreign currency receivables, especially on a specific contract, ask your provider for some alternatives to lock in an actual or worst case rate to convert. Locking in an actual rate, or at least a worst-case rate, to convert your future foreign currency receivables, is known as ‘hedging’. Hedging can give you more certainty in forecasting your future cash flows and help you to meet budgets. Hedging can also help take out some of the emotion associated with foreign exchange dealing and therefore help you to concentrate on your main business of selling products or services. As a rough guide, your provider will probably only want to help you arrange some hedging if your annual foreign currency turnover is at least the equivalent of A$500,000 per year, with a minimum parcel size of at least A$100,000.

Remember, foreign exchange products are very flexible and it usually doesn’t matter too much if you can only estimate future amounts and timing. However, if in doubt about your amounts, always do deals for less rather than more; if you end up being over-hedged, Murphy’s Law says it will not be in your favour.

Regarding timing of future receivables, most providers should usually make arrangements that allow you to bring forward or extend settlement dates to allow for normal commercial circumstances.

It is probably even more important to take steps to check your provider is only taking a reasonable margin on hedging deals, than it is on your spot deals. This is because the market rates for hedging deals are not readily available: your provider will know this and may therefore try to take unreasonable margin without your knowledge. One way to check the margins from your provider on hedging deals is to get a price from another provider you have used in the past, or has been trying to win your business, but make sure that both providers are pricing off the same spot rate so you can compare apples with apples. Otherwise, use an independent treasury consultant who has access to Thomson Reuters or Bloomberg pricing models and market rates. This type of consultant should be able to replicate the pricing on most types of hedging deals, without margins.

At the end of the day, it does become a subjective decision as a provider who has spent a lot of time understanding your needs and working on the best solution to meet your needs, will expect to be rewarded with a reasonable margin. You just need to be comfortable that you have minimised costs for your business, but still have a good relationship with your provider who is spending time on helping you.

Merryl Swan is founder and managing director of KISS Market Info (www.kissmarketinfo.com), which provides daily information and consulting by subscription.

Why does currency fluctuate?
While you should always keep your core business as the main focus of any foreign exchange strategy, it also helps to know why currency fluctuates to help determine whether you should consider trading in a major currency—such as US dollar, pound sterling or euro—even if not trading with the home country of those currencies, or whether it may be worthwhile selling in your buyer’s currency.

The strength of the Australian dollar will affect exporters in a number of ways; it affects the price and/or margin of goods and services, which will influence competitiveness against other countries’ exporters. A low dollar may attract more business, while a high dollar gives extra purchasing power to exporters that import or that have expenses in other currencies, for example for offshore operations or travel.

Factors that influence demand for a currency include a country’s inflation, its interest rates, economic outlook, monetary policies, and the buying and selling activities of speculators. This means that currencies do not move in tandem with each other, so it is possible for the Australian dollar to rise against the euro while falling against the yen, for example.

Due to global economic volatility, it pays to re-examine your foreign exchange strategy in light of commodity prices and the interest rates and the strength of the domestic economy in the currency’s home country. Demand for commodities and commodity prices for some of Australia’s main exports therefore contribute to the overall strength of our dollar, which is why you should keep an eye on those figures even if they are not part of your industry.

Interest rates and the strength of a country’s domestic economy also play roles in currency performance. This is mainly due to currency traders and speculators who are attracted to currencies from stable countries with high interest rates. Generally, speculators will sell low-yield currencies to take advantage of higher interest rates; in countries with smaller economies, such as Australia and New Zealand, this can have a sizeable impact on the currency.
—Adeline Teoh

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