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.
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:
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.
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.
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.
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 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, 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:
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).