The ‘Brexit Effect’ – Protecting your business against currency volatility

Protecting against currency volatility
Protecting against currency volatility

As June 23rd approaches and the date of the much anticipated EU referendum draws closer, there is no doubt that the pound has been through a period of significant instability. Several milestones along the path to a potential Brexit have caused sterling to fall dramatically against both the euro and dollar, including the announcement of the referendum date by Prime Minister David Cameron and former London mayor Boris Johnson throwing his support behind the ‘Brexit’ movement. Recently we also saw the pound’s value drop following the terrorist attack in Brussels at the end of March. If the pound’s reaction to these events has taught us anything, it is that the currency markets are extremely volatile and can by influenced by many unexpected, external factors.

As a business trading internationally, a drop in sterling strength can be extremely detrimental to company revenue. Companies which specialise in foreign exchange, like Caxton FX can offer services which your bank does not, and will help protect your business against the volatility of the currency markets. These include bespoke hedging products to help manage currency risk, such as:

  • Rate Watch and Limit Orders

This a great option for those who have time to wait to achieve a certain rate. A specialist currency provider can put a Rate Watch into the market and will contact you when the rate has moved to your desired place, with no obligation to trade. A Limit Order operates on a similar premise, but instructs the business to trade if the market reaches a particular level.

  • Forward Contracts

A Fixed Forward contract allows a business to ‘lock in’ a particular exchange rate in advance of trade. Flexible Forward contracts allow a range of dates to be selected for the settlement of a contract, with a small variation in the rate of exchange for flexibility depending on the volatility of the currency pairing and the length of the flexibility dates.

  • Vanilla Options

Vanilla Options give the buyer the right to exchange a currency at a predetermined rate (the Strike) at a particular time. Unlike Forward Contracts, owning a Vanilla Option dos not require you to use it. You are able to convert at the market rate if this is preferable, meaning you won’t lose out if the rate changes.

Ultimately it is about being informed. Companies like Caxton who place a high priority on customer service, will offer your business tailored options that the banks cannot. As well as these hedging options, specialist foreign exchange providers will frequently beat the banks on exchange rates, extra fees and international charges. In these times of currency volatility, it pays to have experts manage your money.