Exchange rate risk management for SME companies
Exchange rate risk is a reality that SMEs who export and import need to protect themselves against.
In instances of large purchases or sales, an incorrect assessment of the exchange rate risk may result in a loss of margin that's significant enough to compromise the profitability of the transaction, even to the point where it causes losses for the company.
The following will explain the main currency hedging techniques which help minimize the exchange rate risk for companies as well as the currency exchange services that b-sharpe offers to Swiss SMEs for their import and export activities.
The consequences of no currency hedging
An SME importer/exporter who buys or sells goods or services in a foreign currency can decide not to hedge against exchange rate risks. In this case, the exchange transaction is conducted upfront with the exchange fee on the day of the transaction when the company actually arranges for the currencies to be exchanged. However, a company may have invoiced its customer weeks or months before.
The consequences of this type of exchange transaction for a company are as follows:
- The exchange rate is favourable to the company. It makes money on the exchange transaction.
- The exchange rate is unfavourable to the company. It loses money on the exchange transaction.
As you may have noticed, this is rather akin to gambling, which, in the interest of sound management and risk mitigation, is not necessarily desirable. To avoid this risky situation, financial institutions offer various hedging techniques.
b-sharpe, an expert in currency exchange for businesses and individuals, offers not only the best exchange rates in the industry, but can also advise you on various strategies for optimising your exchange transactions and reducing your exchange rate risk.
Various currency hedging techniques for minimising exchange rate risk.
Invoicing in local currencies
Billing in foreign currencies
- The Indexation Clause on a Currency or Currency Basket: the customer and supplier decide in this case to index the amount of the transaction in a currency that's neither the customer's nor the supplier's. In certain situations, the two parties can also agree on an indexation to a currency basket. Here, the customer's and the supplier's goal is to share the exchange rate risk and not end up having one take more than the other.
- The Multiple Exchange Clause: with this clause, the customer and/or supplier can decide to settle the transaction in one of the currencies listed in the contract. For example, with this type of contract, a buyer may decide to pay the invoice in Swiss francs, euros or dollars, provided that the contract contains such a clause as well as these three currencies. This clause is also called the "Multiple Currency Clause".
- The Shared Risk Clause: a contract which includes a shared risk clause allows you to manage the period from invoicing to payment of the invoice by having part of the fluctuations contractually taken care of by the buyer and the other part by the supplier. As a general rule, the distribution is 50/50: the risk is therefore shared.
- The "Tunnel" Indexation Clause : this type of clause uses a specific exchange rate as a reference. This rate is then associated with a % variation which then gives the maximum and minimum limits from which the currency can fluctuate without affecting the price of the transaction. When the limits are exceeded, the transaction price is impacted accordingly. For example, a contract can stipulate that the prices are fixed on a EUR/CHF exchange rate of 1.10, with a percentage of 2%. As long as the exchange rate is between 1.10 - 2% (or 1.078) and 1.10 + 2% (or 1.122), then the transaction price does not change.
The Currency Option Clause: this type of clause has a contractual exchange rate (minimum or maximum) which makes it possible for the buyer or seller (depending on the contract) to conduct the transaction in another currency. For example, this type of contract could stipulate that with a EUR/CHF exchange rate of 1.30 or higher, the buyer can pay the invoice in dollars. Please note that in this case, it's an option and not an obligation.
For example, a Swiss company who buys 200,000 EUR worth of goods and sells 250,000 EUR worth of goods to another company will be:
- subject to a currency risk on the sum of 250,000 - 200,000 = 50,000 EUR if it uses the netting technique
- subject to a currency risk of 250,000 + 200,000 = 450,000 EUR if it does not use the offsetting technique
Solutions for limiting your company's exchange rate risk
The most frequently asked questions...
Each month, cross-border employees are subject to exchange rate fluctuations between the Swiss franc and the euro when they look to exchange their salary. There are several ways to do it, but they're not all equal from a cost perspective.
Saving money is always good. b-sharpe's service saves an average of 70% on the margins that banks usually charge on top of the exchange rate for Swiss border salaries.
For a cross-border employee exchanging 5,000 CHF to EUR per month, the yearly savings would be approximately 624 EUR.
Additionally, our service is compatible with all configurations, so you don't need to change banks, whether in Switzerland, France or elsewhere.
b-sharpe is an online service which allows border-workers to exchange their Swiss francs for euros at the best rates.
With b-sharpe, cross-border workers don't need to change banks. They simply transfer the amount of their salary in Swiss francs that they wish to change to euros. b-sharpe then takes care of the exchange and transfers the euros into their bank account.
The diagram for the exchange and transfer of your salary is as follows:
- Your employer sends your salary in Swiss francs to your regular salary account (Swiss or foreign bank).
- Using b-sharpe, you transfer the amount of your salary in Swiss francs that you wish to exchange for euros.
- Once the exchange has been completed, b-sharpe transfers the amount in euros to the bank of your choice in France, Switzerland or elsewhere.
With b-sharpe, your employer can also directly transfer your salary to b-sharpe without going through a Swiss bank.
Transfers are insured against fraud and piracy
The b-sharpe multi-currency exchange platform ensures all customers' transfers against fraud, for a total of 3 million CHF. Your money's security is our priority.
An exchange and funds transfer service with the highest security standards
Hosted in Geneva, Switzerland, the b-sharpe platform benefits from the most advanced encryption technologies, thus ensuring 100% security for your transactions (whether for the exchange of your cross-border salary in Swiss francs or for transfering a sum of euros to your bank).
Contrary to the majority of banking establishments and exchange offices, b-sharpe has adopted a policy of total transparency with respect to its cross-border clients. For each exchange transaction from Swiss francs to euros, you'll know the exchange rate actually applied and the margin we also apply.
For each transaction, the reference rate used by b-sharpe is the interbank market's real-time rate. Our platform is, in fact, in constant connection with the major players in the currency market.
For more information on the exchange rate, take a look at this blog article: How an exchange rate is calculated (in french).
As such, our clients can be assured that the exchange rate charged by b-sharpe will always be as close as possible to a currency's actual rate, and they won't have to pay more for their transactions in foreign currencies.