Posts Tagged ‘foreign exchange’
Tool of the Trade: Forward Contracts
Monday, June 25th, 2007
Forward Contracts are a very useful tool for all of those importers/exporters who have to keep their margins tight.
For many companies the "head in the sand technique" is very popular. Order goods today, send over the deposit and then in 6 weeks when the goods are about to come into the docks and payment on the rest is due, that’s when they notice the market has moved and "oops" - it has gone the wrong way. Here is a quick but effective example:
A US company wants to buy goods from the UK. They are quoted at 100,000 GBP, and the UK company expects to be paid in Pound Sterling. The order is placed and the US company has 2 choices: one is to pay the deposit using a spot payment and pay the remainder on a spot payment in 6 to 8 weeks as per the contract, and the other option is to buy a forward contract which includes the deposit money.
If we had a price of $1.95 to the pound at the time of the order and a forward was booked, this would equate to a cost of $195,000. The US company would know from day one how much those goods from the UK were going to cost so prices in the states could be set accordingly.
However, if a spot price was used it might look something like this: 30% deposit, 30,000 GBP at $1.95 is $58,500 and then 6 weeks later the markets have moved and the dollar is weaker and the US company is now buying the remaining 70,000 GBP at $1.99 per Pound. A total of $139,300 added to the deposit paid means a cost of $197,800 for the same 100,000 GBP - a difference of $2,800 for doing the same job.
Now I know you can argue that the markets could move the other way and you could save a similar amount; but what we are talking about here is piece of mind and good business sense. If you know how much something is going to cost you in advance then you can plan your budget and your cost; but a major event in the world the day before you have to buy currency could be devastating on your business. Let me help you make your business more profitable - if you are exchanging currencies around the world we can help wherever you are based.
Tags: Apfx S, Apfx Services, Doing Business Internationally, exporting, foreign exchange, forward contacts, import
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Foreign Exchange - Necessary Evil or Increased Profit Opportunity?
Wednesday, May 30th, 2007
In days gone by, if you were a large company you may have employed your own Financial Director to watch the markets, or maybe someone from your bank was assigned to your account to specifically deal with your overseas transactions. Small and medium companies were left to fend for themselves. When a payment had to be made to an overseas supplier, the bank was instructed to send the payment and deduct the currency equivalent from their account. This led to high charges and poor rates of exchange; but the market has changed. Independent traders offer not only competitive rates but a whole host of other services to make sure that even a company with a small amount of currency exposure can be kept informed and up to speed with the markets.
So everything is great for all companies…well no. Everyday I speak to people offering my services as an Independent Currency Consultant. No fees, I say; no contract, I say; are you interested in what I can offer you? No, they say, and why? Well usually it is down to the old syndrome of "better the devil you know", I’m staying with my bank. But why? After I have just proved that I have access to better rates of exchange and shown that they have no one person advising or looking after their account they still want to stick with their bank.
I cannot stress enough how much information is out there, it really pays to look around.
If you can find a broker you can work with they are worth their weight in gold; but be mindful there are some out there offering "fantastically" low rates, and sometimes this is just to get you in. Once you are settled the margins are increased and the rate you get is not as competitive. What you should be looking for is a broker who not only gives consistently good rates but is proactive with you, letting you know when significant changes are occurring with currencies that you use, giving you advice on booking forwards, how much and for how long, helping you make the most out of your foreign exchange and helping to change it from a necessary evil to an opportunity of increasing profit.
Tags: Accounting, Andrew Parsons, Apfx Services, Finance, Finance and Accounting, foreign exchange
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