Exporters can protect against a stronger Pound but which solution meets your needs?

The number of exporters in the UK is on the rise, so says UK Trade and Investment (UKTI). In fact, on 19th November, UKTI regional Director, Paul Noon, reported that exports from the West Midlands were up 30% in the last two years and The Organisation for Economic Co-operation and Development (OECD) upgraded their growth forecast for Britain in 2014 to 2.4 percent, up from their previous forecast of 1.5 percent. The Bank of England did likewise and the treasury has followed suit.

All of that is good news and the UK government is working hard with trade missions and incentives, to help businesses in the UK gain a foothold in tough overseas markets.

One of the benefits of the hammering the Pound took during the 2008/2009 crash was that UK production was cheaper for overseas buyers. However, that position is changing.

It may have taken 3 ½ years for the Pound to get back to 2010 levels and there is a long way to go before it is back to pre-crash levels but the strengthening pound is diminishing returns for companies who have made gains on the export front.

So this is a good moment to pause and reflect on what the strengthening Pound means to your business or indeed, the businesses of your clients and to look at the means available to companies to mitigate that risk and ensure they remain competitive and profitable in export markets.

 

Risk free

Companies which are totally averse to risk can guarantee their exchange rates at the beginning of any transaction by simply selling all their currency receipts in advance. If you have sold all your US Dollar receipts two years forward at a fixed exchange rate, you have no risk and your costings, profit and cash flow forecasts work seamlessly. On a commercial basis, you may not want to put all of your eggs in one exchange rate basket but there is no underestimating the comfort of certainty.

 

Risk reduced

People often think about their currency exposure in black and white terms; either we cover everything or we do nothing. However, there is often wisdom in hedging some exposure but allowing room to take advantage if the exchange rates move in a beneficial way. Many treasuries set a parameter of 50% or 80% of their currency risk and cover that portion with forward contracts or something similar. That leaves the remainder as a means to mitigate any exchange rate losses or gain a little if the markets are favourable.

That remainder can be protected with either an automated 'Stop Loss' order to guarantee a worst case scenario or may be protected with an option which secures the rights to that minimum exchange rate but does not oblige the owner of the option to execute that right unless it is beneficial to do so.

 

What will be will be

If this is the preferred course of action, then do nothing until the funds are received. Convert funds at the point of receipt and there is a chance you will benefit from the exchange rate movement in the intervening period. There is obviously an equal chance that the opposite is true and exchange rates will be eating into profit margins. 

This carries quite a risk in a market which can move 5% in a matter of hours when economic changes fuel volatility. Most importantly, there is really no need to run that sort of risk or to jeopardise hard earned profits when the alternatives are so very simple to implement.

A little bit of risk management will give peace of mind to your finance department, the Sales Director and to your shareholders. Why wouldn't you?

By David Johnson, Director, Halo Financial.

For a free no-obligation consultation, call +44 207 350 5470. Or visit www.halofinancial.com/mei  

Additional information