Volatile foreign currency markets present opportunities

Every business with overseas exposure needs to take a proactive approach to its foreign currency management if it is to protect its profits in wildly unstable markets, according to Caxton FX, the leading foreign currency broker. In the process there are also opportunities for gains.

Writing in a CBI guide launched to coincide with the Business Summit on 11 June, Caxton FX's Chief Executive, Rupert Lee Browne points out that the consequences of currency volatility can be huge as swings of more than 20% in the currency can produce even larger windfall losses or gains as costs as well as profits are subjected to unpredictable risk.

"Companies find increasingly that dealing with foreign currency exposure is a major headache. The short-term outlook is for dollar weakness but it is hard to guess where the rate will be in six months time," says Lee Browne. "The alarming change for businesses in the last year has not just been the scale of the devaluation or revaluation of the pound in that period but the changes in the direction of the currency are happening at a much faster pace than in the past. That makes it much harder for businesses to protect their profits even on projects that are completed over a period of months let alone years."

In the last 18 months, the pound has swung wildly from a peak of $2.11 in November 2007 to a low of $1.36 in December 2008. Now it has recovered to $1.66 with a gain of 9.5 per cent in three weeks in May. That's the largest gain in a month since 1985. The pound has also fluctuated against the euro, falling nearly 50% in 2008 to a low of €1.03 in December. This year it has slowly begun to climb back and has reached a high of €1.16.

The guide offers seven key steps to effective currency management. It outlines how by adopting simple hedging strategies and using currency brokers who can advise on timing and offer the most competitive exchange rates, it is possible for businesses to buy certainty, security and reduce their costs. Rather than bundling the foreign exchange in with the rest of a bank's financial package, this is the time to use experts.

Lee Browne advises anyone who has to handle foreign currency exposure to ask themselves three questions: What is my level of exposure to currency risk and is my strategy the most effective way of managing it? How can I improve the management of foreign exchange? Am I getting best value for money from my brokers or banks?

CASE STUDY

Zoran Sepanovic, the CFO of property design firm YOO is a regular user of a currency broker to protect his revenues. "The vast majority of monies we pay out are in sterling but 75-80 per cent of our revenues are in euros. I review any cash balances we have twice a month. We don't have a high volume of transactions but they are often sizeable payments. So when we receive a large sum at the end of a project, we immediately review the rates to see when we can convert. That's where having a dedicated, proactive broker really helps."

"I don't have the time or inclination to spend a huge amount of time on foreign exchange; we are here to manage the cash situation and to run our business. Having a broker that is dedicated to providing that forex service on a day-to-day basis is ideal to stay on top of any currency movements."