Reduce your currency exposure

Exchange risk management for companies

SME’s that engage in import and export, must protect themselves against the reality of currency risk.

When buying or selling for significant amounts of money, an incorrect assessment of currency risk may lead to serious losses, enough to compromise the profitability of the transaction, causing losses for the company.

We can see in the following examples, the principal hedging techniques which can minimise the currency risk for companies, and also the foreign exchange services which b-Sharpe provides to Swiss SMEs for their export and import activities.

The consequences of a failure to hedge a currency exchange

Trading SMEs which buy or sell goods or services in foreign currencies may decide not to hedge against currency risk. In this case, a sale or purchase is made using the exchange rate on the day of the transaction, via the spot rate, at the time the company actually makes the exchange. Or a company may invoice clients weeks or months earlier.

The consequences of such a transaction for a company are the following:

  • the exchange rate is favourable to the company: it makes money on the transaction
  • the exchange rate is unfavourable to the company: it loses money on the transaction

 

You’ll understand that this situation is not far away from simple gambling. It is not sound limitation and management of risk, in short it is not desirable. To avoid this risk, financial institutions offer various hedging techniques.

b-Sharpe, exchange specialists, for businesses and individuals, offers not only exchange rates that are amongst the most attractive on the market, but can also advise you on different strategies to optimise your foreign exchange transactions and reduce your currency exposure.

The various hedging techniques which minimize the currency exposure of companies

Invoice in the local currency

Swiss SMEs may, for example, decide to charge in Swiss francs when selling goods to a foreign company. In this situation, the Swiss company negates its own risk, which falls to the client: from the point of view of risk, this is ideal for the export company, but commercially it means that the customer will compound his currency exposure in the valuation of the business proposition. Moreover, if the exporting company is in competition with other companies perhaps in tender for example, such a proposal may reduce interest in the tender.

Invoice in foreign currecny

Swiss exporting SME’s may invoice in foreign currencies. The main advantage in this case is commercial, as this allows the client company to completely control its budget, and to compare the commercial offer with all potential suppliers in the case of tender. For the Swiss company, the problem occurs at the level of currency risk. For a Swiss importation company, the problem may be that the supplier invoices in a foreign currency, which means there is currency exposure for the Swiss company.

Indexation clauses

In the case that the company invoices (or is invoiced) in a foreign currency, it is possible to employ mechanisms that limit that risk. These mechanisms are typically contractual clauses that are included in contracts of sale or purchase. These clauses are generally the result of negotiations, or are at least one of the integral components of a negotiation. Indexation clauses are generally specific and are dealt with on a case by case basis. Among the various possible indexation clauses are:

 

  • The indexation clause on a currency or basket of currencies: Customer and supplier in this case, decide to index the value of the transaction in a currency that is neither the customer’s nor the supplier’s. In some cases, the two parties may also agree on indexing to a basket of currencies. Here, the customer and supplier distribute the currency exposure and each takes on no more risk than the other.
  • The multiple exchange clause : With this clause, customer and / or supplier may decide to settle the transaction in a foreign currency indicated in the contract. For example, in such a contract, a buyer may decide to either pay an invoice in Swiss francs, euros or in dollars, provided that the contract has a clause including these 3 currencies. This is also called a “multi-currency” clause.
  • The risk-sharing clause: A contract which includes a risk-sharing clause, allowing a management period to settle the invoice, and taking charge contractully a portion of the currency variations partly by the buyer, and partly by the supplier. Typically, the distribution is 50/50, of the shared risk. The risk is thus shared.
  • The indexation “tunnel”: This type of clause takes, as reference, a precise range of limitation. These limits are linked to a range of % which gives a range of a maximum and minimum limit within which the currency can deviate without impact on the price of the transaction. However, once the limits are exceeded, the transaction price is changed accordingly. For example, a contract may determine that prices are fixed on an exchange rate of EUR / CHF 1.10, with a percentage of 2%. As long as the rate is between 1.10 – 2% (or 1,078) and 1.10 + 2% (or 1,122), the price of the transaction does not change.

The currency option clause: With this type of clause, there is a contractually agreed exchange rate (minimum or maximum) at which point it becomes possible for the buyer or the seller (depending on the contract) to complete the transaction in an alternative currency. For example, such a contract could provide for an exchange rate EUR / CHF 1.30, at which point the buyer may pay the invoice in dollars. Note that in this case, this is an option, not an obligation.

Compensation

Compensation, also called “netting” is a technique of ensuring that a company takes into account all the inputs and outputs to a given currency, so that inputs and outputs are compensated at best rates relative to each other, and thus reduce the currency risk.

For example, if a Swiss company buys EUR 200,000 of goods and resells to another company for EUR 250,000 the goods will be:

  • subject to foreign exchange risk of 250,000 – 200,000 = 50,000 EUR if using the compensation technique
  • subject to foreign exchange risk of 250,000 + 200,000 = 450,000 EUR if it does not use the compensation technique

The solutions we propose to limit the currency risk to your company

Whatever your situation, (whether a Swiss company that exports or imports), our exchange professionals can advise you on how to best optimise your trades in foreign currencies and minimise your currency risk. We offer particular solutionscurrency futures (a futures exchange contract which fixes the rate by contract over a given period) or currency option ((The currency option offers the opportunity, against payment of a premium, to benefit from a predefined exchange rate during a given period, whether the option is exercised or not).

They recommend us!

An overall winning & trustworthy service with savings on (i) Money - I cannot find a better all-in FX rate! and (ii) Time - I moved from physically withdrawing & changing @Migros bank over w/e's to online (e-banking + email) with b-Sharpe. In addition you gain on better decision making - you choose anytime when and how much to change. the b-Sharpe team turns it around in 24h and I'm informed exactly what rate was applied. I see the transfers on my a/c within a further 24h!
B. Manish
B-Sharpe provide a unrivalled platform and service within their industry. The level of service and professionalism that I have experienced first hand is a testament to the dedication of the company to service their clients needs. The process regarding all transactions is smooth and swift and I can only offer my highest recommendation for this team.
Smith Paul
Contracts Manager

Try it, sign in with a few clicks!