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Navigating the Uncertain Waters of Foreign Exchange

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By Nigel Green, Managing Director, GPS Capital Markets Ltd.

Dealing with uncertainty and volatility in the Eurozone is becoming a familiar burden. As such, businesses need to protect themselves against mounting exposure and risk. Because of the global marketplace, most companies find it impossible to avoid exposure to some form of currency risk. Whether a company is exposed directly in the form of foreign currency volatility on their receivables or payables, or indirectly, through an overseas competitor’s pricing, identifying and managing these risks before they impact the bottom line has become crucial to running an effective business.

Risks can come in a variety of forms; some stem from political issues, some come in the form of social upheavals and others can be purely economic. But those who take the proper steps in managing global risk find they actually can have a lot more peace of mind.

One such strategy involves implementing a responsible and effective hedging strategy.

To Hedge or not to Hedge

Hedging is simply a form of risk management, similar to buying insurance. Take life insurance, for instance. An individual will purchase a life insurance policy in an effort to protect their loved ones against the possibility of their unexpected demise. When a company hedges, it protects its business from volatility in the currency markets and in so doing, shields the price of the underlying product it is importing or exporting.

Transactional Hedging gives companies the ability to lock in a rate, by taking out a forward contract, for either the full or partial amount of the underlying product they are importing or exporting, thus taking away either all or a large portion of the FX volatility. The movement of Euro Sterling from highs before Christmas of 1.24 against the mid 1.18s at the time of writing this article is a prime example of how exchange rate fluctuations can have a real financial impact on a business’s bottom line. Hedging allows companies to focus on their core business and trust that the numbers remain unencumbered by FX fluctuations.

Don’t go it alone

When considering FX hedging, it is important to look at the company’s appetite for risk and review its corporate foreign exchange policy. What works for one company will not work for another. If the company’s risk profile is conservative, it is important to match those needs to an appropriate strategy and vice versa for an aggressive profile.

Nigel Green

Nigel Green

At times, it is easy to get mired in the complexities involved in risk management and FX hedging. Organisations should look at what they are expert at and seek help for what they are not. Navigating the currency markets requires a unique skillset. As such, there are not any cookie-cutter approaches when it comes to managing global transactions and conducting business internationally.

Numerous companies in the UK and throughout the Eurozone have been looking for a provider with the right expertise and experience to help them understand the options and select the best strategy that is right for their company and situation.

To that end, GPS Capital Markets was recently approved by the Financial Services Authority, now the Financial Conduct Authority, to operate as an Authorised Payment Institution, and opened its European head office in London. GPS Capital Markets began in the United States, and has grown into one of the world’s leading independent providers of foreign exchange management services to mid-size businesses with international operations or supplier networks. It has a unique blend of FX hedging, payment processing, exposure management and treasury management services. Its objective is to help companies reduce risk and strategically navigate through volatile foreign exchange challenges.

With its new facility in London, GPS is better situated to help our clients in the EU strengthen their position in the market.

A financial tremor in one corner of the globe can have a lasting impact on a company’s ability to conduct business in another. The best results for any company will come by taking the time to carefully identify risks and have a hedging plan that will protect profits as the business landscape changes. For now, the one thing that can be counted on is continued uncertainty and volatility around the world. The need for companies to hedge and protect their global exposures will only continue to grow.

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