Advantages of currency exchange risk management for businesses
In every area of business, there are risks and variables you simply can’t control, but you still take measures to mitigate and protect against those risks, such as a health and safety policy or insurance. While it might not be as visible, the risk of currency exchange rates varying unexpectedly or dramatically can be just as much a danger for a business.
Forward Contracts
One of the most popular ways to control currency exchange risk is a forward contract. This is an agreement made now to carry out a currency exchange on a fixed date in the future. Usually you put up a small proportion of the cash now as a deposit, such as 10%. The key is that you also agree now the exchange rate you’ll use then.
There are several variations on a currency forward contract. For example, you can set a limit order, where you don’t set the completion date, but rather you set the exchange rate you want to deal at. Once the order is set-up, the exchange goes through as and when the market rate hits your chosen limit.
Stop Loss Orders
A stop loss order works in a similar way, but you set a trigger level based on the market rate moving in the “wrong” direction. To put it simply, a limit order means waiting to get a particular deal, while a stop loss order means setting down the worst deal you’ll take if things go wrong. Some companies will combine a limit order and stop order so they can control the full range of possible outcomes.
The Advantages to Businesses
Using forward contracts offers companies that deal with overseas clients and suppliers many advantages. At its simplest, it restricts the degree to which companies are exposed to currency fluctuations that could mean revenue (in pounds) from overseas sales drops or that the costs of importing supplies rises suddenly.
Forward contracts don’t just reduce risk, but in some cases they can offer 100% certainty. A good example is where you make a deal with a foreign buyer that they will pay you for an ongoing order in foreign currency in six months’ time. The problem is that you don’t know how much that payment will turn out to be worth in pounds. You can solve this by setting up a forward contract to exchange the payment into pounds at a set rate in six months, meaning you know exactly how much you’ll be getting, making cashflow forecasting much easier.
Tags: agreement, Risk management, order, exchange, limit order, moving in the wrong direction, exchange risk management, safety policy
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Tags: business, money saving tips, amount, exchange, price, Household, save money, earn money onlinePersonal loan rate increases ‘disproportionate’
October 23, 2007 by admin
Filed under News, News-Loans
There have been widespread increases in personal loan rates in wake of the interest rate hike in July, according to recent research.
Figures show that the rises are disproportionate to the interest rate increase with an average increase of one per cent APR to personal loan rates since July this year compared to the 0.25 per cent base rate increase.
Differences also exist between offline and online deals, with APR currently at 8.7 per cent offline and 7.7 per cent online.
Mike Naylor, personal finance expert at the company carrying out the research, uSwith.com, said: “There are already huge variations in the loan rates available to consumers amongst both online and offline deals.
“Throwing the personal pricing smoke screen into the melting pot is just causing further confusion, making it a complete minefield for consumers to shop around and get the best deal.”
He added that consumers should exercise “caution” if offered “personal pricing” for offline deals as this was not necessarily in their interests.
Banks have also been criticised recently for excessive charging on credit cards and overdrafts as well as on currency exchange.
