Service: Business strategy 

Sector: Professional services 

Why should businesses manage their currency risk?

23 Mar 2022

As a business importing or exporting from the UK, you are exposed to the volatility of the foreign exchange markets.

If your currency exposure is not managed properly, this can be highly damaging to your budget, margins, profits and overall business goals.

In 2021, the pound was worth as little as €1.10 and as much as €1.19 against the euro, fluctuating by 8%. Against the dollar, the pound fluctuated by around 7%. With events unravelling in Ukraine and worldwide, we have already seen heightened currency volatility in 2022 and this is likely to continue.

As a business with currency exposure, it is worth considering: 

  • Do you chase the ‘best’ exchange rate or manage your currency exposure effectively?
  • What effect would a 10% movement in exchange rates (against you) have on your profit margins?
  • Do you have a currency risk management policy in place to help you manage your currency exposure and make informed decisions?

Why do you need a currency risk management policy?

Below is an example of a UK company that buys its goods from the United States. The business did not manage its currency risk. This table details the impact a 5% fall in the GBP/USD exchange rate had on their underlying profitability and sales.

By failing to hedge its currency exposure from the outset, a 5% fall in the value of the pound has reduced the company’s profitability by nearly 30%. To maintain the same level of profitability, the company would need to increase sales to over £7m p.a. – an increase of over 40%.

Why do businesses fail to manage their currency exposure?

We have come across many businesses that do not manage their currency risk for several reasons:

  • The business owner doesn’t have the time, knowledge and experience to manage this risk proactively.
  • Currency exposure is not seen as a significant risk to the business and the business owner is often unaware of the potential losses it could face.
  • The systems used to value and report the risk are inadequate.
  • The business is solely focussed on the spot rate at the time and is always looking to benefit on 100% of their currency exposure, should exchange rates move in their favour.

We often see businesses posting foreign exchange losses, which have occurred when they’ve only tried to improve their spot price (usually by 0.1% - 0.2%) without considering the implications of a much larger (3% - 10%) market movement over a period of time.

Should you base your decisions on currency predictions?

Alternatively, businesses may try to base their decisions on predictions about what will happen to currencies in the future. However, not even the experts can accurately foresee where the market will move next, so basing any decisions on currency forecasts can be dangerous.

Below are rate predictions from major banks for quarter two of 2022 (April-June) and the possible impact on your budget. If you were exchanging £1 million for USD, the predictions carry a disparity of $210,000, and for EUR a disparity of €160,000. This large disparity between predictions shows how unreliable they can be.

Gerald Edelman works with Smart Currency Business

No matter how large or small your currency exposure is, business owners and their finance teams should always take the time to evaluate foreign exchange risk.

At Gerald Edelman, we have partnered with currency risk management specialist, Smart Currency Business, who can work alongside your company to help develop your currency strategy and policy. Smart’s personal dealing service will help you regularly review and monitor these. This is to ensure they are fit for purpose and that you are protecting your cashflow and profit margins as best as possible. 

If you want to know more, please speak to your relationship partner for more details, or contact directly at, 07940462653. 

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