FX considerations

Hello, I’m Ollie Pryke from Barclays’ Corporate Bank foreign exchange team. Today, we’re going to look at some key considerations for a business when reviewing their foreign exchange strategy. Corporates who trade overseas are often exposed to the changing value of currencies. This can pose a risk to profitability, and therefore management may look to identify a strategy which will allow them to proactively manage the risk and protect their margins.

In order to build a strategy, it’s essential to consider previous and future currency requirements. Certainty of cash flows and the length of contracts will vary, and so to help determine the amount of risk a business is exposed to, it’s important to regularly review the accuracy of forecasts. For example, if there’s an imbalance between receipts and payments, a business may look to implement a hedging strategy, which will allow them to manage the risk with their budget rate in mind. So, that leads us nicely to budget rates. A business may set a budget rate to determine the cost or income of the product or service they offer in foreign currency.

Typically, these will be worked back to the operating currency, which is often Sterling. A consideration, then, for a corporate can be to determine if certainty of the exchange rate is a key driver for their strategy or whether they require a flexible strategy to react to market moves and competition in their given sector.

Okay, so a business with a clear view of forecasted volumes and a low risk appetite can look to implement an active hedging strategy. Forward contracts enable businesses to lock in their foreign exchange rates, protect their profit margins, whilst accepting rates may or may not move in their favour. If this strategy is decided upon, then consideration should be given to the forward rates available compared to their set budget rates. A further consideration would be the percentage of exposure to cover forward and for how long.

Some key determined factors here would be certainty of cash flow, FX rate expectations, management view, and risk appetite. Common examples of this approach are retailers hedging their supplier payments and consultants hedging their revenue contracts. On the other hand, businesses might require flexibility in their strategy, and they may look at hedging a smaller portion of their risk and utilise the spot market to manage their exposure.

Examples of this can include corporates operating in highly priced instant markets, and fast-growth technology companies with very limited certainty of projected flows.

Thank you for your time. This has been a high-level introduction into how businesses can approach their foreign exchange strategies. To discuss this further, or to gain a greater understanding of FX products and services at Barclays, please speak to your local Relationship Director or foreign exchange contact, or visit our website, barclayscorporate.com.