Business options for international currency transfers
International trading businesses need to transfer money overseas in a way that doesn’t eat into their profit margins. With global currency transfers carrying a significant set of risks, it’s crucial that businesses stay savvy when it comes to making international transactions.
If your business requires you to make regular currency transfers, the cumulative costs you are exposed to when making single payments can be excessive due to volatile exchange rates.
Halo Financial is authorised and regulated by the Financial Conduct Authority (FCA) and can minimise the risk associated with currency volatility while offering competitive exchange rates to ensure your business gets the best return from each transaction.
The Confederation of British Industry (CBI) predicts that by the year 2050, the Chinese, Indian, Brazilian, Russian, Mexican and Indonesian economies will be larger than those of any European Union (EU) member state.
Many businesses now need to alter international operations and consider conducting trade in other countries to continue to see growth opportunities post-coronavirus.
Firms that operate on an international scale will be able to receive support from the UK government’s Coronavirus Business Interruption Loan Scheme (CBILS) if operations have been disrupted. However, it is also crucial to understand how exchange rates will impact your core markets.
If you’re concerned about how best to maximise your currency exchange, we’re going to detail several currency transfer options that will protect your business against adverse exchange rate movements.
There are several foreign exchange rate contracts available such as forward contracts and spot contracts, which are widely used by businesses to shield their foreign exchange transfers against the uncertainty created by today’s volatile exchange rates.
WHAT IS A FORWARD CONTRACT?
A forward contract is a legal agreement between two parties involved in a foreign exchange currency transfer, whereby the counterparties agree to exchange funds on a specified date at a fixed rate.
There are three popular types of forwarding contracts, these are:
- Closed Outright Forward
- Flexible Forward
- Long-Dated Forward
As the name suggests, closed outright forward contracts offer no flexibility over the settlement date. Businesses who would prefer to have flexibility as an option may want to settle on a flexible forward contract.
Long-dated forward contracts allow businesses to lock in rates over an extensive period, although this can increase counterparty interest rate risk.
Essentially, forward contracts operate on a buy now, pay later platform and by locking in a fixed exchange rate, allows the buyer or seller to avoid the risk of fluctuating exchange rates.
Forwards contracts also allow you to spread payments out over multiple transfers and will enable the buyer to easily budget due to the exchange rate being fixed from the outset and before having to pay.
For example, if you are importing products from the United States and need to pay an invoice for USD 250,000 and are currently holding currency in pounds (GBP), any variation in the pound to US dollar (GBP/USD) exchange rate will directly impact how much it costs to buy the US dollars (USD) in pounds Sterling (GBP).
A forward contract locks in an exchange rate from the outset to protect you from exposure to future currency fluctuations for the length of time the contract has been fixed for.
WHAT IS A SPOT CONTRACT?
Spot contracts are convenient for businesses who don’t make international currency transfers often. Companies can use spot contracts to lock in an exchange rate at the current price level in the market, for settlement and delivery within two working days; albeit some currencies can be settled and delivered into the beneficiary account on the same day.
Spot exchange rates are advantageous through their ability to lock in a prevailing exchange rate and complete your currency transfer immediately, which is ideal if you need to make an international payment urgently.
WHAT ARE MARKET ORDERS?
Market orders execute a trade immediately and a target-specific rate of exchange is achieved. If you’re after a specific exchange rate, you can activate a market order with your foreign exchange provider, who will secure that rate when it becomes available.
Naturally, the exchange rate which you desire is not guaranteed as it is subject to currency volatility, although if the exchange rate becomes available, your foreign exchange provider will ensure the currency transfer is facilitated.
There are two main types of market orders – a limit order and a stop-loss order.
Limit orders are instructions to buy or sell currency from your currency provider at a specific exchange rate that is better than the prevailing market exchange rate.
Stop Loss Order
Stop loss orders are instructions to buy or sell currency at a specific exchange rate that is worse than the prevailing market exchange rate and will only activate a market order once the stop price has been reached.
They are often used when the value of a currency is expected to move favourably and perform the function of a safety net by giving the buyer or seller the assurance of a worse case exchange rate. Should the prevailing market exchange rate move against the buyer or seller, the stop loss order protects against further deterioration in the exchange rate and further losses.
As stop market orders can be set above the current market price, many brokers now add the term “stop on quote” to explain that these types of orders will only be completed once a valid quoted price in the market is met.
WHAT IS A CURRENCY OPTION?
A currency option is a type of contract that gives the buyer the right, but not the obligation, to buy or sell currency at a specified exchange rate on or before a specified date.
Currency options are popular with corporate businesses and financial institutions to limit currency risk and hedge against volatile exchange rates.
Aside from limiting downside risks, currency option contracts have unlimited upside potential for profitability.
IMPORTANCE OF HAVING A RISK MANAGEMENT STRATEGY
A comprehensive risk management strategy will better protect you from significant financial losses triggered by fluctuations in currency markets.
Currency volatility can consume profit margins through their ability to impact various business costs, such as payables to overseas suppliers or receivables from export goods and services sales.
Corporate firms and companies with appropriate currency risk management strategies can minimise the foreign exchange (FX) risks associated with currency volatility through the use of appropriate currency contracts.
The effective management of foreign exchange (FX) risk and the constant monitoring of economic, political and social domestic and international issues, can be challenging for chief financial officers (CFO’s) and financial directors (FD’s) to manage alongside other priorities within their businesses.
Crafting and implementing a currency hedging strategy, where a corporate company is not over or under hedged, is essential when trading in international markets to ensure currency risks are minimised and the underlying value of the currency transactions or profits are not eroded.
If you need further assistance in how to manage international payments and currency risk, our team of foreign exchange (FX) market specialists will take the time to understand your financial objectives and use their expert knowledge to help you make decisions appropriate to your business needs.