Over the weekend, news emerged that overseas footballers in the UK; of which there is a higher proportion than in any other international football league; have been attempting to hedge against further falls in the value of Sterling.
Sterling has fallen around 15% against both the euro and the dollar since Britain voted to leave the EU, dropping 3% in the past 3 months, and creating problems for businesses and individuals alike. In the case of the Premierships’ multi-millionaire footballers, many are asking to be paid in Euros, a request which football clubs, even those as rich as Manchester United, are struggling to accede to, due to the fact they do not hold sufficient foreign currency reserves.
Currency hedging can be a tricky business; knowing when to buy or sell a currency is an instinct that the best FX currency traders, for example, possess, but not even they can get it right every time. So what are the best options for individuals and businesses with financial commitments overseas? Let’s look at 3 strategies that might help to protect against unexpected, unplanned for losses.
Take control of your risk with financial projections
If you are a seasoned entrepreneur, business owner, or traveller, you may feel that you have an understanding of how currency movements play out, and what can be done to hedge against them. But experience alone is not enough; to ultimately make the right choices, planning ahead is essential.
All businesses, and even most domestic households, create budgets to try to plan for the future. In order to plan a currency hedging strategy effectively, it can be useful to plot different scenarios; a best case, worst case, and most likely case, for example, is a good start.
By plugging in different currency fluctuation scenarios into your budget, it should be possible to calculate when, for example, a sale and delivery of goods overseas becomes unprofitable, a holiday or spell abroad becomes prohibitively expensive, or, alternatively, when it becomes attractive to spend in the short term for longer term financial gain.
There is no guarantee that your scenarios will play out in real life, but they can certainly provide an effective way to manage your currency risk. It is up to a business, or individual, to decide how much appetite they have for risk – but before doing that, it is essential to have a clear picture of what kinds of problems and issues different attitudes towards currency risk will throw up. Fail to prepare,prepare to fail, as they say.
Consult a professional broker
If you are do not feel confident about which strategy is best for you, your family or your business, then it may be worth reaching out for professional help.
International currency brokers naturally charge a fee for their work, so it’s important to decide if the level of risk you are exposed to justifies the extra cost. Sometimes, currency related losses are simply unavoidable due to market, or political forces; witness the current situation in Venezuela, for example, where the government has been forced to launch its own Petrodollar cryptocurrency, a hedge against the Venezuelan Bolivar, which has simply spiralled out of control owing to uncontrollable levels of inflation.
If your currency risk exposure is long term and consistent, however, i.e. you are making regular overseas payments or regularly selling goods overseas, then a broker can help. They are likely to have a superior knowledge of how the markets may move, and not only that, they have access to vast, cheap, quantities of foreign exchange, giving them a significant advantage in the marketplace.
Interacting with a broker on a regular basis will improve your own knowledge of the FX markets, so you may not need to consult directly with your broker over every transaction, but if you have a significant foreign currency exposure, working with an FX broker represents a no-brainer.
Open a self-managed account
Thanks to the rise of disruptive technology, there is a great deal more transparency around the FX markets than there once was. Most brokerages, and a growing number of fintech startups, provide the means for you to run your own currency hedging service. There is no shortage of newsflow, either.
Comparison sites like The Money Cloud can give you an instant overview of the rates, fees, and transaction times offered by a range of MTOs (Money Transfer Operators), and even provide a digital dashboard that helps you quickly negotiate AML (anti-money-laundering) and KYC (know your customer) checks, store all of your transaction history for future reference, and even use techniques such as AI and machine learning to help guide your decision making process.
Brexit has created huge disruption in the value of Sterling, and the instability shows no signs of abating. Within the EU, nothing is guaranteed, as trade wars with the US and differing political agendas create uncertainty, whilst the US, China, Russia, Africa, the subcontinent, Asia and Australasia all have a role to play in sudden and unexpected foreign exchange fluctuations.
As discussed above, there are many different strategies that you can use to protect your own interests, whatever they may be; the one thing you can’t do, in the current environment, is do nothing. Other than that, it is up to you; whether you are an entrepreneur, traveller, or pro-footballer; to decide how best to hedge your currency exposure.