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Businesses and currency risk – managing volatility in an uncertain world

We are living through a period of political and economic change and uncertainty. This is particularly true in the UK, where it has been impossible to tell what effect the developments around Brexit will have on the markets or the strength of the pound.

By Christina Wadlow, Head of Partnerships, Western Union Business Solutions

Over the last year, the value of the Sterling fluctuated significantly, and with continuing uncertainty we can expect more of the same.

For any business, uncertainty can be bad news, but especially if you are involved with importing, exporting or any other activity that needs transactions to be made in foreign currencies. Negotiated prices and calculated profits can be significantly impacted if the exchange rate moves against you on the day a payment is being made or received. This can be a major concern for small and medium-sized enterprises which don’t have a specialist risk team in-house.

What is hedging?

Hedging simply means managing against movements in exchange rates. However much rates fluctuate, you can fix your transactions in advance, so you know exactly what your costs, cashflows and profits will be, putting you in control of your bottom line. 

This way, your cashflow is stable, your business forecasts are reliable. By setting a hedging strategy you no longer have to react to the market; you are layered from volatility so you can focus on your business without unnecessary distractions.

Choosing the right currency provider

Many businesses involved in currency-based transactions have concerns about currency risk, but many will all have very different priorities, transaction volumes and business goals, so there is no ‘one size fits all’ when it comes to setting a hedging strategy. That is why it’s a good idea to use a currency specialist who will take the time to understand your business and who can give you support based on years of knowledge and experience.

Many SMEs choose to work with their bank to make currency transactions, but banking staff aren’t necessarily experts in foreign exchange, and may not be able to offer the same level of advice and expertise as a specialist currency provider.

Setting a hedging strategy

There are a number of tools used to hedge against currency risk. Products such as forward contracts enable a fixed exchange rate to be secured for a future date or, for a predetermined cost, options products allow for flexibility to take upside gains whilst protecting a minimum rate. For many SMEs who are new to the world of currency trading, these products can seem daunting. A good currency specialist will explain all the jargon and the many options available clearly, so informed decisions can be made which benefit the business long term.

With any hedging tool, there are associated risks. Your foreign exchange provider should ensure that you know exactly what these are, so your decision-making is informed, and you are confident and comfortable with the choices you make. 

The information contained within this article does not constitute financial advice or a financial recommendation, is general in nature and has been prepared without taking into account your objectives, financial situation or needs.

This information has been prepared solely for informational purposes and does not in any way create any binding obligations on either party. Relations between you and WUIB shall be governed by the applicable terms and conditions. No representations, warranties or conditions of any kind, express or implied, are made here.

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This article has been approved for distribution by Western Union International Bank GmbH,  UK branch (Branch Address: 131 Finsbury Pavement, London, EC2A 1NT) is a branch of Western Union International Bank GmbH (registered in Austria, company number FN256184t, VAT Number ATU61347377, with its registered office at Schubertring 11, 1010 Vienna, Austria) which is subject to limited regulation by the UK Financial Conduct Authority and Prudential Regulation Authority. This has been prepared solely for information purposes only.