New foreign exchange service – hedging strategies for SMEs

World First is the first currency broker to offer foreign exchange options for the purpose of hedging foreign currency exposures, an absolutely invaluable service at this time of economic uncertainty.

Until now, foreign exchange options have only been available to large corporate clients through their banks. Now, we can offer them to smaller companies in the UK. And with the current volatility in exchange rate movements, anyone transacting overseas is looking for ways to better manage their risk.

SMEs involved in import and export have, until recently, only two ways to manage their exchange rate risk:

1) Take the prevailing (spot) rate at the time when they needed to make a foreign currency payment. Importers are exposed to a falling exchange rate but are also able to benefit from a rising exchange rate. And the opposite applies for an exporter. This is an ?un-hedged‘ position

2) Fix the exchange rate with a forward contract. This enables a company to price into its budget the exact cost of, or income from, the goods it is importing or exporting and protects from adverse exchange rate moves. However, the company is unable to benefit from any subsequent improvement in the rate

World First can now offer a third alternative: hedging strategies that are tailored to fit a company’s exposure, currency forecast and risk appetite. They can protect against unfavourable exchange rate movements but also allow companies to take advantage of any beneficial shifts.

How do our hedging strategies work?

There are a number of different strategies but generally they work in the following way: they enable a company to guarantee a worst case rate (like a forward contract). This worst case rate will always be inferior to the actual forward contract rate. The difference between these two effectively ‘pays’ for the company to be able to benefit from a favourable move in the rate which can be unlimited.

The two most widely used strategies are:

- Participating forward – providing a worst case rate for the full transaction amount, like a forward contract. However, it also provides a company with the ability to ?participate‘ for 50% of the amount in any favourable exchange rate move

- Protection tracker – providing a worst case rate for the full transaction amount, like a forward contract. However, it also provides a company with the ability to fully benefit from any favourable exchange rate move less a pre-agreed number of cents

Nick Robinson, director, said, “It is really exciting to be able to offer these strategies to our corporate clients as they can have such a positive impact on their business. Having a service like this at their disposal helps smaller companies compete on a more level playing-field with their large corporate competitors.”

For more information, visit worldfirst.com.