The Irish economy generates foreign exchange (FX) flows of approximately €200 bn every year from the import and export of goods and services in addition to financial flows. Volatility in the FX markets is an ever present challenge to financial managers and business owners who are trying to minimise the impact that movements in FX rates can have on their core business.
An effective and flexible hedging strategy can achieve the dual aim of protecting the bottom line while giving the business the opportunity to benefit from an improved exchange rate environment in the event it becomes achievable throughout the year. The reality is that nobody can predict where the market will be in 3, 6 or 9 months time but we can examine current conditions, weigh up how these factors will evolve over the coming months and make informed decisions based on these considerations
What you can do?
Spot contracts are suitable for those who need to buy or sell a currency quickly, and need to make payments to suppliers or convert sales proceeds immediately. Price and speed of delivery are the most important factors to consider.
This type of contract allows you to book an exchange rate for a specified date in the future. Forward contracts are a useful hedging tool that allow you to lock in a rate now for a transaction at a later date, providing certainty as to the Euro equivalent of your income or expenditure. This allows you to protect your business against adverse movements in the currency markets.
Typically an option is a contract that gives you the right, but not the obligation to exchange money at a pre-agreed exchange rate on a future date. However, for the extra flexibility that foreign exchange options can provide, there is a cost to purchase these contracts in the form of an up-front premium.
Orders can be left out in the market, allowing you to target an exchange rate that is better than what is currently available. When the target rate is reached, you will automatically buy or sell the currency required. These can be useful if you have specific currency requirements but are not restricted by tight deadlines.
STOP LOSS ORDER
A stop loss order allows you to set a minimum or ‘worst case’ exchange rate at which you will buy or sell your currency. It is put in place to ensure that, should rates move against you, you have a safeguard in place to protect against further dis-improvement beyond your ‘worst case’ rate.
If you need any advice or information, contact FMB by calling 01 645 2002 or emailing email@example.com.
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