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FX volatility - the bottom line

Western Union Business Solutions

From politics to international trade tensions, recent economic turbulence has highlighted one thing more clearly than ever: risk management strategies have to be in place to protect profits for businesses trading internationally.

If you are responsible for a business’s finances; many hours of expertise are poured into choosing the right opportunities and tracking yields but if there is an international element, even a small change in the currency exchange rate can have a significant effect on profit or the value of returns.

With currency rates fluctuating up to five percent in a month last year, volatility is a real threat to any international business transaction. A five percent profit margin is hard earned but can be quickly lost with an unfortunate turn in the exchange rates.

This uncertainty exacerbated by the UK place in Europe has caused some to be inclined to stall the purchase of currency with a “wait and see” approach; dealing all FX on spot with their incumbent banking provider.  But large swings in rates means that currency volatility and pricing have become higher on the agenda for many; highlighting the need to get the best from a reputable provider.

Working to develop strategies based on the unique needs of a business means budgeted levels can be set and protected. If you are trading internationally you may want to speak to a qualified risk management consultant to consider the following steps:

Understand your exposures:  businesses could struggle to manage currency risk without understanding where exposures exist and reviewing what they currently do to protect themselves from volatility.

Start by assessing your goals, risk appetite, and tolerance to volatility. Is there a budgeted level which is used for accounting purposes? Consider, for example, credit needs and payment requirements such as cost of transfers, bulk payments or international routing.    

Create a strategy: With an understanding of your objectives you have the power to start making informed decisions.

Identify some goals specific to managing currency risk. These could include defining a target exchange rate for some or all your exposure.  Consider establishing a formal risk management policy to define processes.  Select the right risk management tools for your business remembering that one size does not fit all. 

Tactics and execution: Once the most appropriate tools have been selected, applying the right trading tactics can mean the difference between success and failure. For a lot of businesses, the strongest strategies often recognise a framework for executing trades at favourable levels while protecting against material risks.

It may also be important to review the market and identify recent trading patterns to understand the risks and opportunities available.

Evaluate and adapt your strategy

Just because a policy has been in place for a long time does not necessarily mean it is still relevant in the current market conditions. Monitor your strategy and consider adapting it to identify shortfalls and build on success. Use a platform which can provide thorough and detailed reporting to assist your decision making.

As a provider of cross-currency, cross border payments around the world, Western Union Business Solutions (WUBS) recognises that for a lot of our clients, foreign exchange volatility should be limited as a risk factor. WUBS can offer products which match your strategic currency objectives depending on the needs of your business. In addition, we offer competitive spot rates, optimal routing and cost effective transfers. Our globally leading online platform not only facilitates online payments and bulk upload but can also give real time access to positions and mark to market valuations.

If you need further insights to help you manage risk, Western Union Client managers are happy to speak to you about your requirements.  Please call 0207 539 6911 or email partners@wu.com

This article has been approved for distribution by Western Union International Bank (UK branch) which is subject to limited regulation by the UK Financial Conduct Authority and Prudential Regulation Authority.