A few simple currency hedging strategies

How to protect yourself and your business from the pound dropping even further.

A while ago Ashoka Mody said Britain “should embrace the weaker pound and it needs to fall further” and Sterling continued to slide. We look at a few simple ways to protect you or your business’s money from volitile currency markets.

Firstly, two examples of the recent devaluation of GBP in real money terms.

If you buy stock from abroad.

If (for example) you regularly buy stock from abroad in EUR, USD (or any other currency for that matter) you would have seen the cost of imported goods rise almost 20% between December 2015 and October 2016. This can potentially have a big effect on net profits especially if your customers would be resistant to GBP RRP price rises.

If you are buying a property abroad.

Or, you may well have started the search for a holiday home in the Italian hills or the French Riviera. You may be further down the line and have begun to put offers in. Unfortunately, almost daily the cost of EUR 500,000 is growing. For example, back in December 2015 it would have cost £365,000 (GBPEUR @ 1.37). In October 2016 it would cost £454,000 (GBPEUR @ 1.1), that’s an increase of nearly £80,000 for the same property.

Different types of currency hedging tools?

There are a few basic hedging tools you can use to lock in an exchange rate and reduce risk in volatile markets.

We offer several options including

  • Currency forwards
  • Stop loss entry orders
  • Stop loss exit orders
  • Foreign exchange options
  • Leveraged speculative/hedged positions

Using a currency broker can help a wide variety of business clients exchange and send money worldwide. From importers and exporters currency broker hedging tools help these organisations manage and exchange their funds more effectively.

If you are a business, you are in the business of making money. By definition, that means cutting costs and making savings in an effective manner. Currency hedging tools can help you do both; and may save you time and money.

Getting a good exchange rate isn’t the only reason businesses set up a currency hedging account.

Currency brokers offer a more personal and proactive service that banks are often unable to provide. Or you can simply our online platform and manage all your foreign exchange and international payments online.

When and what currency hedging tools to use?

If you have the money now.

You can just convert it into EUROs via a spot fx trade and let it sit there in your EURO account until you need it.

If you only have some of the money now.

You can use a currency forward to lock in the current rate for up to 1 year in advance. A small deposit of 5% for 6 month forward or 10% for 1 year forwards would be required as a deposit. The balance of the GBP would then be due at the settlement date when you receive the foreign currency.

If you are a sophisticated Forex trader.

You can buy a currency option. These are generally only offered for conversions over £1m. Like a stock option you buy the right, but not the obligation to buy a set amount of currency in the future. There is an upfront cost called a premium which is non-refundable and the cost of protecting your price.

If you are a Forex speculator

You can open a forex trading account and place a leveraged currency trade. By doing this you can hedge the entire amount of currency for in some cases a deposit of only 0.5%. You will need to fund your account with enough to cover the daily profit and loss. When you need to do the actual conversion you close the position and the additional cost of the currency should be offset by the profit from the trade.

You can do this without having to pay capital gains tax (at the moment) with a spread betting broker or use a traditional Forex broker.

One thing to be mindful of though is that if you do put a currency hedge on or lock in the current rate and Sterling begins to strengthen you will not benefit from the rise.

Be mindful, it is very simple to protect yourself from losing money, but very difficult to predict the direction of a currency with the view to making a profit by speculation.

The CME, where GBP is traded against the USD as a currency future has recently reported that net-short positions are at an all-time high.  Suggesting that speculators and hedgers are already protected and betting on the market going down.  Excessive bearish sentiment is often a warning sign that things are about to change.

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