From XU Magazine, 
Issue 27

What if your costs increased by over 10%?

Managing foreign exchange exposure

More than a year after being declared a pandemic by The World Health Organisation, the full and lasting impact of COVID-19 on global trade remains to be fully understood. Casting a fresh spotlight on supply chain vulnerabilities, the pandemic magnified problems that had been previously overlooked. The impact Covid-19 had on supply and demand across the world economy triggered unprecedented levels of volatility and highlighted the importance of risk management for businesses.
This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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In the years preceding the pandemic, the markets had remained relatively calm, and in spite of a few spikes in volatility in 2016 following the Brexit vote, 2018 and 2019 were somewhat stable. This meant many small businesses did not consider developing a company-wide foreign exchange policy. So, on March 20, 2020 when sterling fell to its lowest level against the US dollar for 35 years, with the GBP/USD exchange rate moving from 1.3157 to 1.1494 in the space of a few days (a shift of around 12.6%), companies that were making US-dollar payments from sterling during that period, without any forward contracts in place, would have witnessed a dramatic difference in the amounts received from the same payment had it been settled on March 10, compared to March 20.

The trifecta of volatility, debt expansion and low interest rates therefore made businesses re-examine their risk management strategy in a way that hadn’t been done since the 2008 global financial crisis. Adopting a strategy to protect against foreign exchange risk and exchange rate volatility affecting import and export prices is subsequently more important than ever, but what can finance directors and business owners do to reduce risks from future fluctuations?

Should you have a FX risk management strategy?

If you or your clients raises a proportion of revenues or pays a proportion of costs in a foreign currency that is significant to your business, we think YES, it’s a good idea to find out how a solid risk management strategy could benefit you. Strategies will vary in size and complexity according to business needs, but products are available that could help you approach potential exposure in a sensible and measured manner. 

Hedge against uncertainty

Hedging can introduce predictability to your future FX rates, increase visibility of your cashflow, and protect your internal budgets and profit margins from foreign currency fluctuations.

A forward exchange contract with WorldFirst can be entered to facilitate payments for identifiable goods, services or direct investment (making a capital investment in an enterprise to obtain a lasting interest in it). The main types of forward contracts WorldFirst offers are Fixed, Window and Flexible Forward Contracts. WorldFirst can help formulate a contract that suits the SMEs needs to make supplier payments or receive income by evaluating the risks and benefits of each strategy.

Understanding that there is no ‘one size fits all’ approach, WorldFirst offer a range of flexible hedging solutions that helps SMEs take advantage of favourable currency movements so they can focus on growth and stability. 

Flexible hedging strategies:

  • Static hedging: can be used to protect a budget rate by purchasing forward contracts to cover your budget rate for a chosen period.
  • Rolling hedging: involves simultaneously opening a new contract as the previous one expires - this could benefit a company that receives updated transaction forecasts on their FX exposure throughout the year.
  • Layered hedging:  unlike static hedging, a layered hedging program uses forward contracts with different execution and value dates, unlike a static hedge that sets rates for the whole hedging period.

Risk management solutions overview

You can approach your currency risk in a number of different ways; from spreading out the purchasing of currency over an extended period to using risk management and hedging methods to curtail your risk exposure to the FX market itself. WorldFirst specialise in the creation and execution of these strategies for our clients and we use a variety of different products and methods to achieve this:

Forward contracts

Buy or sell an amount of currency at or before a set time in the future. A forward contract is a hedging product that allows you to secure an exchange rate over a set period of time on a predetermined volume of currency. Forward contracts help mitigate currency risk without SMEs having to buy currency upfront on the spot market. The forward price is always based on the current spot price. With WorldFirst you will be able to lock in a rate 24 months in the future.

Spot contracts

An order allows your company to agree to transact an amount of currency for immediate delivery (within 2 working days) if you can get a particular rate. We’ll offer you a rate based on a live market rate (or “spot”) and you can choose whether or not to transact then and there. The amount of currency agreed for immediate delivery can either be a rate better than where the market is trading (to try and catch the rate when it moves in your favour) or worse than where the market is trading (to ensure you have a worst-case rate).

Firm orders

If you’ve got a target exchange rate in mind, but don’t have time to keep track of market movement, WorldFirst can act on your behalf. A firm order allows you to instruct us to execute a transaction at a rate of your choosing. When the rate hits your desired level, we’ll make the transfer the moment we can secure your currency at the agreed rate – 24 hours a day, 7 days a week.

How can WorldFirst help?

WorldFirst helps customers move money around the world with simple, fast and affordable FX transactions. Since starting out in 2004, more than 240,000 businesses have utilised our services to send more than £87bn around the world. In 2019, WorldFirst became part of the Ant Group, the operator of digital lifestyle platform Alipay, which serves 1.3 billion users worldwide with its global e-wallet partners. By leveraging one of the largest global commerce ecosystems since its coming together with Ant Financial (now Ant Group) in 2019, WorldFirst has accelerated its vision of becoming the best financial services platform for international business.

Today, WorldFirst provides a range of tools and services far beyond global money transfer, with international payment and collection accounts, marketplace integration and hedging products.

What does this mean for you? 

WorldFirst understands the level of expertise an accountant can bring to SMEs, that’s why we partner with accountants to help their clients save on their international money transfers with our tailored end-to-end solutions and accountancy software integrations. Our team of dedicated relationship managers will work with you on the best strategy for reaching and supporting your clients. Here are some of the ways they provide support:

  • Save SMEs time and money when paying international suppliers via our transparent pricing structure.
  • Provide robust hedging solutions to help protect a client’s profit margins.
  • Combining technology with fantastic personal service, to find the most suitable solutions to streamline their payment flows and business processes.
  • Customers are able to connect Xero to their WorldFirst currency accounts to seamlessly reconcile their transactions.

Why leave it there?

For more information on how your accountancy or bookkeeping practice can benefit from partnering with WorldFirst or how we can help your business

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