Small business advice: How to mitigate global currency
In today’s global economy,
many small businesses are either engaged in cross-border commerce
plan to be soon. As a result, complex currency
liabilities arise, so managing the value of future payments or
receipts grows increasingly important.
Before we delve into some basic strategies to protect your
business from fluctuating currencies, let’s have a look at some
important best practices.
First, know your overall currency exposure. Once
you know your vulnerabilities, you can employ basic hedges to
mitigate currency risk.
Second, abandon the “casino mentality” and leave
risk-taking to professional currency traders and investors. Devise
a hedging strategy, employ it and sleep easy at night. Don’t
fret thinking you could have fared better had you waited a week on
a transaction. You know what rate you’ve bought at and your
profit margin isn’t threatened.
Third, always maintain a long-term
perspective. The market may initially move against you after
locking in a rate but it will just as quickly move back in your
favour. Ignore the noise and regardless of what percentage of
exposure you hedge, remind yourself that uncertainty is removed and
instead focus on growing your business.
Basic hedging tactics
Hedging your currency exposure is much easier
than it seems once you have the correct mind set. Here are a
couple of commonly used and straightforward tactics to employ.
The forward contract is the most commonly
utilised hedging strategy among small businesses and has seen an up
take of approximately 25 percent in usage since 2008. It’s a basic
and sensible strategy for firms with regular payments and receipts,
offering a hedge against volatility whilst allowing you to
construct fixed and reliable cash flow forecasts.
At its core, a forward contract is a contract to
buy or sell an asset (in this case a currency) at a specified price
at a future date. It locks you in to a rate of exchange for a
future payment, for example. For the majority of small
business owners this is as complex an instrument as you’ll
A forward-extra (sometimes known as a
risk-reversal or forward-plus) would offer a protective rate
guaranteeing you a price if the base currency weakens. If the
market moves favourably you may also have the opportunity to
exploit that shift and buy at a cheaper rate.
Again the potential upside is capped but the
gain is in guaranteeing a “worst-case” price, while retaining the
opportunity for a better rate down the road.
Slow and steady wins the
It’s an oft-used cliché, but in this case is a
In 2013, several global corporations, including
behemoths such as Coca-Cola, took hits to their earnings and
revenues due to rapid and violent currency movements which were
unforeseen even by their savvy CFOs. If large corporations can be
affected by currency volatility, so too can small business
Know your currency exposure, lock in a hedge
that will provide certainty for your business and don’t worry about
short-term ebbs and flows in the currency markets – focus instead
on growing your business.
Guido Schulz is Chief Strategy Officer at
Associated Foreign Exchange (AFEX), a global payment solutions
provider to small and mid-sized companies.