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The thing about foreign exchange is that people don’t really understand it.
I’ve been involved in trading and deliverable FX for about twenty years and in all that time I’ve seen very few people that actually understand it, let alone explain it. I’ve seen many people claim to understand it, but even more people bury their head in the sand and ignore it.
Speculating on FX is a huge business, because it’s one of the most reported on, volatile and liquid financial markets. Because it’s a global market it’s always open. And becuase, the events of nations are so dramatic, there is always something you can take a view on.
However, individual traders generally lose money. That’s because it’s so hard to predict. So, it’s hard to speculate to make money.
But what about protecting your corporate profits from exchange rates moving against you?
Everyday you see companies reporting that “adverse currency exposure” has caused a dent in (or totally wiped out) their profits.
So what do you do about it? You talk to someone who does understand it.
I’ve known Mark for around fifteen years and used to deal spot, forwards and options through him at Man. Now running RAM FX (with co-founders Richard and Anthony), a boutique foreign exchange hedging, execution and advisory service we get his take on OTC FX options and how they can be used…
First off, what do you do, who do you do it for and why do you do it?
What – we advise, execute and manage positions on behalf of clients who have a need or want to trade FX. As a small, independent boutique we call upon our many years of experience to offer a true hand holding experience. We are slightly old-school in terms of our approach. Our clients are people we get to know, not just a number on an overnight report.
Who – we have a variety of client types, including HNWIs, funds, corporates, trading vehicles and other brokers. We work with both speculative traders as well as those with a need to hedge exposures. All our business comes from word of mouth and referrals.
Why – it’s what we’re good at, what we enjoy doing and an area in which we strongly believe we can offer real help and worthwhile assistance.
OTC FX options are gaining popularity as a corporate hedging tool. What would you say are the main advantages of including them in a corporate hedging strategy?
Options, if used correctly and wisely, can offer far greater flexibility than the alternative such as forwards. A bought option offers the right, but not the obligation to buy one currency for another. The fact that there is no obligation is the key.
They can provide a client with a low risk trade entry, profit protection or a known stop loss. For client with a need to hedge they offer protection while allowing the client to benefit from a currency move in his favour. A client can know his worst case scenario or funding requirement at the outset of a trade.
What about the main risks of using OTC FX options? What in particular should businesses be mindful of when using them?
I mentioned the need to use options correctly and wisely. The key risk is that a client gets involved with inappropriate option structures or option structures that they do not fully understand. As with anything, in the wrong hands they can lead to problems, but in the right hands risks they are an excellent tool.
For our corporate clients FX is merely a by-product of their business and creates something of a headache. As such they will generally look for the easiest way out rather, which may not necessarily be the best. At RAM, FX is our business, we’ve been doing it for more than 20 years, and we can devote the time and energy to FX that our clients cannot.
Aside from the products we can offer, clients benefit from our desire to really understand their requirements and act accordingly to ensure we maximise efficiency of their hedging. This includes timing of trade entry, regular monitoring of positions and reducing risk by layering and blending trades rather than simply entering one trade in the hope it suits all market conditions.
And finally, what would be your top three online resources that you could recommend to business who want to improve their currency hedging strategies?
Anything that educates a client can be useful. Some of the charting packages such as ‘tradingview.com’ offer excellent features that would previously only have been found on expensive systems. Same with news, which was only available on premium news feeds, can now be found on many websites. Finally a decent event risk calendar is a must – ‘dailyfx.com’ is a worth a look.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.