Q. Some of my revenues are generated in Europe. Since Greece was downgraded I am worried that the euro will continue to fall in value – what can I do?
A.If you earn revenues in euros and then need to repatriate them back to the UK, future currency movements could hurt your bottom line. The first thing to do is to contact a bank or a currency provider and ask them about any products they offer their clients to lock in an exchange rate as soon as possible so that you are not exposed to any future currency weakness. Phil McHugh, corporate dealer at Currencies Direct, says that entrepreneurs should consider buying currency forwards: “This means that businesses can lock in an exchange rate now and take advantage of it up to two years ahead. This is a very useful way of hedging your currency exposure, especially if you know that you will need to change euros into sterling at some point in the future.” It can also be worth asking your bank or currency provider to work a limit order for you. This is when you specify an exchange rate that you want, they put it in their system and don’t execute your trade until the market reaches your specific rate. For example, if you think that after a period of euro weakness the single currency could bounce back, you could specify a sterling euro exchange rate, say €1.10 (currently the rate is €1.15), and wait for the market to come back before exchanging euros to pounds.
Q. I am concerned about currency risk but I am not sure my revenues are large enough for hedging?
A.McHugh says that £10,000 is the threshold at which you should consider hedging your currency risk. He also recommends that small businesses with revenues below £100,000 should avoid more complex financial products to hedge their risk and stick with forwards or limit orders.
Derek Taylor, head of trading at Caxton FX, says that there has been growing interest from small and medium sized businesses in purchasing currency options to protect against euro weakness. The larger the denomination of the option that you purchase the better value it will be. Caxton FX offers options for currency hedging starting at £100,000. There can be benefits to using options, as Taylor points out: “Say you buy a sterling-euro option with the right to sell euros at €1.15, then the sterling-euro exchange rate falls to €1.10, you can walk away from the option and sell your euros for a better price in the market and all you lose is your premium. You can’t do this with a forward rate.”
Q. How much does a currency hedge cost?
A.Usually simple forwards and limit orders don’t cost any extra, although you will pay a spread when you actually make the transaction. When your bank or provider quotes you an exchange rate this price is typically inclusive of commission costs.
To purchase a forward typically you pay 10 per cent of the total amount when you place your order and then 90 per cent when you actually exchange the money in the future. The only extra charges you may incur are transfer fees if you plan on sending the money overseas, but check with your bank or provider first to know exactly what you will be charged.