How to deal with exchange rate risk
If your business exports or imports goods or services, you need to consider how you will protect yourself against changes in the exchange rate. Even a tiny variation in the rate could cost your business thousands of pounds.
You’ll also need to decide how to make and receive payments in foreign currencies.
This guide is aimed at businesses that regularly deal with customers who are based outside of the UK. It explains how to price goods or services, how to combat the risk of exchange rate changes and the practicalities of dealing in foreign currencies.
Foreign currency issues when importing or exporting
Businesses which import or export goods need to bear in mind a number of key issues when making transactions in foreign currencies:
- Foreign currency transactions are sensitive to fluctuations in the exchange rate. A price you agree with a customer or supplier on one day could rise or fall if the exchange rate changes. This is especially true in the current economic climate where currency is fluctuating on a daily basis making it more difficult to keep track of exchange rates. But there are steps you can take to protect yourself against these. (See the section in this guide on how to identify foreign exchange risks).
- If you’re exporting, you must decide whether it’s best to price your goods or services in the local currency of the country with which you’re trading. The decision will depend on individual circumstances and on factors such as how you want to present yourself in that market and how your competitors set their prices.
- If you’re importing components priced in a foreign currency that form part of goods you’re selling in sterling, you’ll need to decide how to price those goods to reflect the exchange rate.
- If you are trading with companies in the eurozone (i.e. the European Union member states that use the euro) there are many practices and standards to make life easier. See our guide on trading in the European Union.
Identify foreign exchange risks
When your business deals in a foreign currency you are exposed to certain risks.
For example, you might find that after agreeing a price for exported or imported goods the exchange rate changes before delivery. Clearly, this can work both for and against you.
Some currencies are more volatile than others because of their unstable economies or inflation. However, the current economic climate is also impacting more stable currencies such as the euro and the US dollar. Your bank should be able to advise you about this.
As exchange rates can go both up and down, it can be tempting to gamble that this will work out in your favour. However, this is extremely risky and could land you with a significant financial loss.
It’s safer to reduce the risk by using one of the forms of hedging available through a bank. Hedging simply means insuring against the price of currency moving against you in the future. There are many different types of currency hedging and your bank should be able to help you with the best solutions for your business.
You could trade overseas in sterling – effectively transferring the foreign exchange risk to the business you’re dealing with. Whether this is appropriate will depend on the product in question and the relative bargaining strength of you and your trading partner.
Bear in mind that exchange rates could have an effect on your business’ competitiveness even if you don’t trade overseas. When a country’s currency loses value against the pound, imports from that country into the UK become cheaper, so you may have to respond to aggressive pricing from competitors who source from that country.
Similarly, if a country’s currency gains value against sterling, UK exports to that country become cheaper.
This article was first published by Business Link.
Foreign Currency and Exchange Rate Risks © Crown Copyright 2012. Source: www.businesslink.gov.uk
Barclays can help you export successfully
Barclays Business Abroad is a package of discounts and banking tools that can give you a great start in the world of international trade. The package includes all the following:
- Introduction to international trading workshop – an immersive workshop that’ll equip you with the knowledge and capabilities you need to better deal with the pressures of international trade
- Free currency accounts
- 25% discount on all outgoing and incoming international payments
- 25% discount on export document preparation
- 40% discount on credit reports (which help you control your business’ exposure to international risk by giving you accurate information on new overseas customers and suppliers)
- Free exchange rate iAlerts – keeping you up to date with any rate fluctuations that could affect your trading
- Our Exchange Rate Risk interactive online tool will help you understand the level of risk you’re dealing with and the potential impact on your business.