Currency Risk Management

Foreign exchange markets can alter very quickly with movements of 5% or more – in a short space of time – are not uncommon.

Protecting yourself  

Cornhill FX offers a variety of tools to help you steer clear of being caught out by exchange rate volatility:

1. A forward contract allows you to lock into an exchange rate for a period of up to one year, meaning that if exchange rates do move against you, you are locked into a more favourable exchange rate.
2. Market orders can help you get the most for your money if you are not restricted by payment deadlines.

You can of course just take the rate of the day when you need to send your money - this is called a spot contract.

An example of the importance in hedging FX risk can be found below:

If a client was invoiced on the 3rd of August 2009 and was due to pay the balance by the 30th October. Rather than open themselves up to any exchange rate risk they could have fixed their rate at 1.1780 on the 3rd on a 3 month forward contract for a total of €500k (costing £424,448.21) , at the time when the trade was settled the funds were released the rate had fallen to 1.1150, which would have cost £448,430.49, this is a difference of £23,982.28, or 5.65%. The low on that 3 month period was 1.0620, £470,809.79 or a 10.92% movement We appreciate that the rate might go up as well as down in this period, but the biggest benefit of being proactive is eliminating risk and safeguarding profits, not trying to improve them by gambling on FX markets.