Even if you don’t have international offices dotted around the globe, if you are dealing with any suppliers and customers based in different countries you will no doubt be aware that exchange rates and currency fluctuations can quickly make a difference to your bottom line.
If you can gain a good understanding of how currency exchange markets work and what options are available to help you hedge against prices moving against you, this could turn out to be a smart move for your business.
Here is a look at how to hedge against unfavorable price movements and why you might want to think about investing in currencies as part of your business strategy.
Don’t dismiss the threat to your profitability
Many businesses enjoy the opportunity to trade in a global marketplace and that is why you should never dismiss lightly the potential impact that current movements can have on your business deals.
Currency markets see more turnover action in just a few days than the stock market witnesses in a year, with billions of dollars of currency deals taking place as speculators bet on price movements.
The relevance of this is that you can see movements of up to 10% in the space of a few weeks, which could easily be enough to change the shape of a transaction if you end up on the wrong side of that exchange rate movement.
It is important to consider how you can take measures to hedge against your profits being severely diminished by an exchange rate swing, so how can this be done?
A spot trade could get you locked in at the right price
A spot trade is when you buy a currency based on a “live” price being offered at a specific point in time and if you give yourself enough time to hold out for the right deal you could lock in a currency price that works for you.
It is a good idea to search for the best forex trading platform you can find in order to carry out your trades as your bank is probably going to offer you a deal based on a daily rate, which is not flexible enough and could see you lose out financially compared to placing a deal based on live prices.
A forward contract could be good for cash flow
A forward contract is when you buy a currency now and lock in the rate with a 10% deposit and agree to pay the remainder when you need the money.
Fixing the rate you are happy with into the future can help to take the uncertainty out of a transaction where you could lose out if the currency price subsequently moves against you in the interim period between the order and completion process.
Forward contracts are widely considered an effective way of protecting yourself from currency risk and can help to ensure that you have a greater element of control over a business transaction struck in a different currency.
Trading currencies should also cost you less commission than you might end up paying to your bank in transaction charges so take an interest in forex trading and improve your odds of protecting your bottom line.