Managing your business’s currency exposure in a world of rapid developments can be challenging. In this blog, we detail why an FX Forward Contract can help offer your business some certainty as part of your broader FX strategy.
Why Should I Have an FX Strategy?
In short, an FX strategy helps you effectively manage currency risk while allowing you to protect your bottom line from market volatility. Recent years have shown how much and how quickly the FX market can fluctuate. Consider the impacts of rampant inflation rises, the Covid outbreak, surprising central bank developments, and geopolitical uncertainty on the market. Working with our Evolve Currency Management risk strategists allows you to plan for your business’ FX requirements while considering events that could create volatility.
What is a Forward Contract?
A forward contract allows you to secure a rate in place for up to a year. You could use a forward contract to cover future supplier invoices, help prepare for market volatility due to an election or other events or help to capitalize on a positive market shift in advance of making a trade. Hedging with a forward contract can also help with cash flows while giving you some certainty about your transaction costs.
What Size of Business Could Utilize a FX Forward Contract?
As part of a hedging strategy, forward contracts can benefit businesses of any size, from SMEs to multi-billion-dollar corporations.
An Example of a Forward Contract
In the summer of 2024, the UK held a general election, and the British pound strengthened against a basket of currencies, including the US dollar. The GBP/USD exchange rate breached the 1.30 interbank mark on July 17 for the first time in a year on the back of optimism that a change in government could stabilize the UK economy. Alongside this, rate-cut bets from the Bank of England lowered off the back of UK inflation readings. The interbank GBP/USD exchange rate on May 9th was 0.80. However, by July 18th, the rate had climbed to 1.3150. For a business with a GBP requirement of £300,000, the amount needed to purchase in May could have been around $375,000. However, in July, that cost could have risen to around $395,000. That’s an additional $20,000 expense to your business in less than two months, simply by not having a hedging product in place*.
Why Talk to Us about a Forward Contract?
Whether you want to avoid price shocks, capitalize on an event, secure a highly competitive rate, or optimize your cash flow, we can help you with a tailored strategy to manage your FX risk effectively. Contact our team today to learn more about managing your business’ currency exposure.
*Please note forward contracts offer certainty for your transaction, but the rate may move up or down.