In our last blog, we focused on some of the considerations that facilitate informed decision-making for businesses when executing their currency exchange requirements – from budget/costed levels to end-user pricing and profitability.
Having defined your business’s goals, it’s time to turn them into reality by underpinning them with currency exchange products. Exchange rates are in a constant state of flux, as they respond to a stream of political and economic variables – from inflation and interest rates to political stability. Various products are available that can mitigate or remove some of the obstacles and nuances involved in making overseas payments.
Some products can eradicate the risk of fluctuating exchange rates driving up the cost of your business’s overseas payments, engendering an understanding of potential profit margins based on end-user costing; while other products can provide wider market access and save you time.
A spot contract lets you exchange currency immediately at the current exchange rate, offering the convenience of making a payment on the same day where possible, but also up to two days in advance. This allows businesses to assess the market on an ad hoc basis when it requires currency for imminent payments or unplanned transactions.
One consideration, however, is that spot contracts do not reduce the uncertainty surrounding the final cost of your transaction. Currency markets can be volatile, causing prices to fluctuate on a second-by-second basis.
A forward contract provides clarity when moving money overseas by letting you fix a price based on the current market rate to transact currencies on a specified date in the future. This valuable tool is typically used by businesses that have known future payments or receipts in overseas currency because it protects budget and profit margins. If you’re making regular overseas payments, or you’re unsure of the exact date of a payment but have some visibility when payments are likely to be made, you’ll benefit from the security of knowing how much these future expenses will cost.
Forward contracts remove the risk of FX volatility negatively impacting the overseas payment cost – enabling your business to have visibility on its future profit margin and end-user pricing.
One consideration, however, is you will be unable to benefit from any cost-saving exchange rate improvements.
Market orders are trading products used to place an order to transact a predetermined amount of currency if a specified rate of exchange is seen in the live market. These orders can be placed to try and achieve an advantageous exchange rate (Limit Order) or protect against adverse market movement with a worst-case exchange rate (Stop Loss order) – and have the flexibility to be placed for a specific time frame or on a good till cancelled (GTC) basis. Having placed your market order, you can rest assured that if your specified rate is hit, it will be secured for the pre-agreed amount you want to exchange – whether it’s a limit or a stop loss.
Structured products can provide businesses with the flexibility to transact at a fixed price while also providing a feature to benefit from advantageous market movement. These products are scenario-based and are typically more complex each with varied outcomes which can be both positive or negative.
There are several currency exchange structured products that may be appropriate for your business, depending on your overseas payment objectives and risk appetite.
Currency markets do not have defined opening and closing times like the stock market; therefore, they are live 24 hours a day. These products provide you with wider market access while saving you time by removing the need to constantly monitor currency markets.
Choosing the right product – or products – that help you turn your business’s overseas payment ambitions into achievements is critical. For example, it may not be appropriate to use a market order to achieve a cheaper cost if you need to make a payment to your supplier in the next hour.
We have shone a light on some products that your business can harness when exchanging currency for the payment of invoices and other requirements – helping you to understand your options to achieve your goals. Each product has differing features and benefits, as well as considerations that need to be made before deciding to implement them.
In our next blog, we will illuminate some currency strategies that businesses establish using the products we have described – focusing on timing, proportional amounts transacted and even a combination of products. We will highlight the features of these strategies and the considerations to make before implementing them – so you can identify the right plan of action for your business that makes your goals come to life.
This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).