Exchanging Currency – how do I ensure value for money?

Exchanging Currency – how do I ensure value for money?

I just buy currency when I need it, why would I change?

Two of the great unanswerable questions asked by Finance Directors, CFO’s and CEO’s are should I hedge my FX exposure, and how do I judge what is the best exchange rate?

Account managers, in answer to the first question, would be expected to answer that “your business is making widgets so why would you expect to be successful as a foreign exchange speculator?”

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know how much the products truly cost
Knowledge is power and for your sales and marketing teams to be able to price your products accurately they need to know how much the products truly cost and the only way to be certain is to hedge your FX exposure so that you know how much your raw materials will cost.

I was occasionally met by “well I hedged my exposures last financial year and was constantly undercut by my main competitor who didn’t hedge and ended up with a lower cost than I did”.

That is a dangerous game and provides a great deal of uncertainty. For example, you are importing from the U.S. and will be invoiced in dollars throughout your financial year and the current rate is 1.3000 dollars to the pound. If you could guarantee that you could buy all the dollars you need at 1.2750 would you accept? If you did, you could provide certainty to your entire business about the costs over the whole year. If you chose not to accept you may, of course be able to buy your dollars at 1.3200 but that is not certain, and you would have no idea what your profit margins would be. This leaves open the possibility that you would be buying at an average of 1.2500.

market is constantly changing
There will always be the possibility of losing out to a competitor on the production side. However, the benefit to your sales and marketing team of being able to manage their customers, provide consistent pricing, and offer discounts with certainty, provides a benefit that provides a longer lasting advantage than a one-off foreign exchange gain.

The second question asked by CFO’s etc is impossible to answer since the market is constantly changing every minute of every hour seven days a week.

To compare exchange rates, it does not pay to look at absolutes. Since the market is constantly changing the only way perform a currency exchange comparison is to understand how much your provider is charging for the same service.

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For example, if you contact two providers ten minutes apart and one quotes a rate of 1.1250 to buy euros versus sterling and the other quotes you 1.1235, you will, naturally, assume that the first provider is giving you the best currency rates.

But consider this, since it is a constantly moving market with several drivers that are constantly changing, without knowing what the underlying market price was, it is impossible to judge.

In the first case. The market may have been trading at 1.1265 and the provider took fifteen points “spread” (margin) from the price (i.e 1.1265 minus 0.0015), while the second provider may have been pricing following a market move with underlying market price of 1.1240 and only taken five pips spread. (1.1240 minus 0.0005)

To perform a foreign currency exchange comparison, it is vital that the provider tells you their margin or mark-up and can prove it. Receiving the best currency exchange can be difficult to prove but it can be even more difficult to find.

know how much the products truly cost
Professionalism, customer service and solid advice are three things to look for over and above price. As the market matures, prices will narrow as providers try to attract customers but these three things must be prerequisite in buying currency.

At Currency Transfer, we try to help our clients understand that spread is and can be a “moveable feast”. Being armed with actionable market information, in advance, can provide you with a benefit that is more beneficial that comparing margin and can save you a lot more money than simply negotiating the spread between different suppliers.

There is an argument which says it is a time-consuming process to hedge currency exposure and it is not always successful, so buying when needed is the way to go. The counter to that is that if you don’t look after every aspect of your cost base you cannot expect to always receive premium service from your suppliers.

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”