2020 started off much like most years, until a global pandemic hit in March and all bets were off. Massive changes to the world economy, and even how we live our lives, meant throwing out all remaining predictions for the year.
Last year we experienced a global recession, record-setting unemployment in the U.S., and high currency volatility. In March, the Euro to Dollar fluctuated a 7% range in two weeks.
Today, nearly a year later, the pandemic continues and we’re still feeling the effects in both volatility and economic pressure. We can only estimate when we’ll have the virus under control and full economic recovery. In the meantime, many businesses have taken steps to offset the slowdown that’s still dragging the economy today, as well as plan appropriately for an uncertain future.
Volatility, Timing, and Cash Flow
There’s a saying in the FX industry: timing is everything. With volatility continuing to be a factor so far in 2021, the more important timing becomes. The longer your payment terms — 30 days, 60, 90, or longer — the more risk you have that market volatility can wipe out profit margins. This kind of volatility can translate into a business loss of thousands of dollars, and have a big impact on a company’s growth.
Even the volatility we’re seeing now, where the Euro can move up to 2% within a trading day, can have a big effect on your business. Fortunately, there are ways to deal with the volatility to help your business not just survive, but thrive in the current economic climate.
Hedging to Tame Volatility
When currency rates move in your favor, you reap the benefits and you’re happy. But when they move against you, they shrink your profit margin. Depending on how narrow your profit margin is to begin with, moving rates can erode much of your profits. Even if you are comfortable with more risk, with today’s volatility, a negative move can have a significant adverse effect on your business.
That’s why businesses can use hedging strategies and tools, to give you the ability to plan appropriately, even when rates are volatile. Three common hedging strategies we recommend are: forward contracts, multi-currency accounts, market orders.
- Forward contracts let you lock in today’s rate for a specified amount of currency, and allow delivery on a specific date (or range) in the future. This works well for businesses who forecast payables into the future, such as one to three months out. It lets them plan for profits while protecting against market fluctuations, like an insurance policy.
- Multi-currency accounts can be used to replace international bank accounts. Multi-currency accounts are much less cumbersome to set up than international bank accounts, and can hold up to 30 major currencies. They work well for a business that’s cash-rich and has a surplus of liquidity, allowing them to buy currencies at a good rate and hold them in the account for future payments.
- Market orders let you set orders to buy or sell currencies in the future, sort of like an alarm clock. With a market order you can set a specified target rate for a currency, while also setting a date for the order to expire, or simply cancel when you want. If the market rate hits your specified rate, at any time of the day or night, an automatic trigger goes out to the market to buy (or sell) that currency for you. It’s an automatic process, and one more thing to work for your business.
Risk Management Solutions for Your Business
There’s no single “best” risk management solution for any business. All of these hedging strategies have pros and cons that should be carefully weighed against your current situation.
To determine which strategy (or strategies) will work best for your business, start by asking several questions, such as: How risk averse is your company? What’s your budget rate? Can it be renegotiated? If so, how often? How wide are your margins? Are your prices able to fluctuate, or are they published in a catalog and set for a certain period?
Risk management strategies can not only help you offset the slowdown today, but can help you set up for a prosperous economic recovery. TEMPUS can help you assess your situation and determine which tools are the best to manage your business risk in the current market, no matter what.
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