Currencies Transfer Whitepaper for Accountants - Halo Financial

Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727. Her Majesty's Revenue & Customs MSB registration No. 12197454. © 2013 Halo Financial Ltd. Registered in England No. 5155787. 11 Ivory House, Plantation Wharf, London, SW11 3TN, UK

David Johnson, Director

HALO FINANCIAL

INTERNATIONAL MONEY TRANSFERS

& FOREIGN EXCHANGE SPECIALISTS

6 Steps to Add Value to your Client’s Currency Needs

Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727. Her Majesty's Revenue & Customs MSB registration No. 12197454.

© 2013 Halo Financial Ltd. Registered in England No. 5155787. 11 Ivory House, Plantation Wharf, London, SW11 3TN, UK

6 Steps to Add Value to your Clients’ Currency Needs

You will undoubtedly have every shade of client. When it comes to their currency management, some clients will be entirely risk averse, some will be out and out gamblers and some will tread a nervous path, unsure of what their options are when it comes to foreign exchange. The way they handle their currency requirements will have a direct impact on the profitability of their business or, in the case of private clients, a significant impact on their personal wealth. Poorly managed currency transactions can jeopardise investment plans, alter pension arrangements and evaporate yields. Here are 6 steps to help you ensure your clients know the risks and take appropriate measures to manage them.

Step 1 - Plan ahead

The sooner a currency exposure is identified; the sooner plans can be implemented to manage the risk of adverse movements. Properly managed, currency transactions can enhance profits. And by appropriate, I mean a plan which works for each individual’s circumstances. The purpose of the currency requirement will have a bearing on the plan you implement, as will the industry sector, the client’s attitude to risk, how certain their forecasts are and many other factors. Often, a suggestion of planning ahead is treated like an incitement to gamble with hard earned funds, but with a properly implemented plan nothing could be further from the truth. A financial professional who mitigates every penny of currency risk cannot be accused of gambling. He or she is simply ensuring the hard won gross profit generated by the sales team isn’t diminished through exchange rate fluctuations. The Sales Director will not be best pleased if they have had to agree a very tight pricing model in order to win the business only to see a 3% fluctuation in the currency rate wipe their profit off the face of the balance sheet. A property investor banking on a specific percentage of return won’t be best pleased if the yield is halved because the Pound suddenly strengthened due to an interest rate hike. Mitigating that risk is far simpler than many companies and investors will realise. If you are not sure of exact forecast figures, it doesn’t mean you can’t manage the bulk of your currency risk. A small top up transaction when the specific numbers are known won’t alter the overall average exchange rate too much. If you start to plan early, you may be in a position to take advantage of an exchange rate before it declines or protect against that decline in other ways. You may be able to offset some of your currency receipts against expenditure; removing the currency risk. Or you may be able to negotiate payments or receipts in your home currency, passing the currency management off to your trading partners – as long as you don’t suffer as a result. Ultimately, although you are planning well in advance, there are times and circumstances when the best plan is to do nothing for now and wait before taking advantage of an improving exchange rate.

Step 2 – Get the right information

So your clients are taking ‘Step 1’ seriously, planning their requirements and assessing their needs, but without the right information or guidance, upon what will they base their decisions? Without relevant, accurate information and perhaps without a little experience and expertise, it would be necessary to wade through masses of facts, speculation and opinions to reach a decision on an appropriate course of action.



Those with the luxury of in-house treasury and currency expertise can use it to their best advantage. If not, and very few companies and even fewer private investors have that kind of resource on tap; it is always worth seeking the help of a specialist. That is precisely why your clients use you and exactly why a currency specialist is a worthwhile ally. There are companies which charge for bespoke currency information, saving their clients the hassle of analysing all the data themselves. There are also specialist foreign exchange brokers who offer guidance on market trends and ought to be able to tailor that information to your client’s specific needs. Be discerning here; a broker who tells you to ‘trade now’ every time you speak with him is simply chasing commission today without keeping your best interests at heart. Make sure your clients choose an Authorised Payment Institution sanctioned by the FCA (formerly the FSA) and check them on the Payment Services Business register on the FCA website. www.fca.org.uk. Make sure they ask for the opinion of the trader and analyse what they are told. Question the broker’s views and check that they will provide as many services as your client needs for their specific requirements; (there are examples of these services below). If your client chooses to trade with that company, it is worth them keeping a record of their views and checking back from time to time to see if they are on the ball.

Step 3 – Timing

No one can control the currency markets. Something like $4 trillion a day passes through the world’s forex trading desks so the movements are as untamed as those of the ocean. And just like a surfer waiting for a wave, those who need to exchange currencies have just one option; start paddling at the right time. Timing is everything in good currency management.

Buy or sell at the right moment and you will avoid risk and enhance profits. A company’s Financial Officer may not be tasked with enhancing the bottom line profit but, if that comes as a by-product of effective management, no one will complain; least of all the shareholders. The error that many make is to assume that if you haven’t traded at the very pinnacle of the market spike, you have not succeeded and that just isn’t a reasonable task to set yourself. Trading near the top of a range is a sensible target and ensuring you do not trade at the bottom is the bare minimum requirement. No one will always achieve the former but there are ways and means to ensure you do not suffer the latter.

Step 4 – It doesn’t have to be all or nothing

All too often we work with companies and investors who see their currency management as a stark black and white image. At one extreme, they may cover all their currency requirements on the day they know they have an exposure or that transaction is left to the very last minute. From my experience, the most effective currency management is a combination of some early cover, some opportunism and some risk management. Your client may feel their currency needs don’t warrant that kind of complication and, they may well be right but for most businesses and most investors there is a lot to be said for having a more flexible approach. Those who saw the Pound slumping in the first few days of 2013 and had the flexibility to buy a little ahead of themselves were probably feeling pretty smug while the Pound languished around USD 1.48 and EUR 1.14. The gain they locked in from the USD 1.64 and EUR 1.23 levels afforded them between 7% and 10% of savings / price flexibility / competitive edge / yield when compared with the exchange rates available 60 days later. Those on a 60 day invoice period and who didn’t cover themselves against risk would have been exceptionally frustrated and physically out of pocket by the moves.

http://www.fca.org.uk/



Step 5 – The right tools for the job

So, the exchange rate has moved in your favour and you want to take advantage of the move but you don’t actually need to exchange your funds for another 90 days. You are perfectly right to wonder, why trade now and perhaps, how do you trade now? The ‘Why’ is answered in this way; it might be that by securing the exchange rate, as those who traded in January did, locks in an enhanced profit, perhaps it simply secures the projected sales profit, maybe it makes the planned investment worthwhile but it will certainly cut the risk of exchange rate decline. The ‘How’ offers a vast array of possibilities and the right choice for your client is best examined by a specialist in consultation with their financial team if appropriate. Spot contracts are the most widely used contracts in the foreign exchange market. It is an agreement to purchase one currency and sell another at a fixed exchange rate and to settle the balances usually within two working days. There is some flexibility available here. The settlement can happen the same day the contract is agreed normally up to 5 working days from the booking of the ‘trade’. If it is beneficial to agree the exchange rate but your client is not yet ready to settle the contract, the most obvious option is to set up a ‘Forward Contract’. That works just like a ‘Spot’ trade but the settlement and exchange of funds is delayed until an agreed date in the future. Most brokers will limit this forward period to one or sometimes two years. The beauty of a ‘Forward Contract’ is that the exchange rate is known well in advance of the settlement allowing the investor or company to budget, cost goods for sales staff, print sales brochures with set and guaranteed prices etc. If the market rate is above a cost level or a company has to send a sales brochure to print or has agreed a long term contract, there are ways to guarantee they receive that costed level as a bare minimum. Most banks will suggest ‘Option’ products to guarantee a worst case exchange rate. For some businesses these are just the right product to use. They either involve the payment of a Premium to purchase the right to buy currency at a minimum level. Or they have a combination of clauses which offset the bank’s risk through a penalty clause. The variety and permutations of options available is as vast as your imagination. In my opinion, for the majority of companies and for most private investors, Options are either unnecessarily complicated or overly expensive. A similar, although not quite so flexible, alternative is the use of automated market orders to guarantee a worst case exchange rate and perhaps to target a best case rate within the forecast exchange rate range. These orders are termed ‘Take Profit’ or Limit orders at the top end of the range and ‘Stop loss’ orders at the bottom end. Used wisely, a combination of the two can be placed to take advantage of any advantageous spikes and to mitigate loss if the market moves adversely.

Step 6 – See currency as an opportunity and not a hassle

Yes the fact that anyone has to convert one currency into another is a hassle. There are no two ways about it but, on the basis that Sterling isn’t about to disappear into the Euro, that even the Euro might not exist in a few years’ time, and the fact that business and investing is becoming increasingly global, rather than fretting about the hassle, I would encourage everyone involved in foreign exchange transactions to embrace the opportunity that currency conversion presents to enhance profits. When managed properly, risk can be eliminated, opportunities can be captured and costed prices can be improved upon. With margins being squeezed, who knows, the finance department could be the company’s biggest profit centre and the currency conversion could be the most profitable part on an investment. Whatever happens, ensuring your clients don’t lose money on their currency transactions is simpler than ever.



For Further Information If you have any questions, then please get in touch with Halo Financial. You can contact our foreign exchange specialists on +44 (0)20 7350 5470 or drop us an email via [email protected]

www.facebook.com/halofinancial

www.twitter.com/halofinancial

www.linkedin.com/company/halo-financial

mailto:[email protected]

Currencies Transfer Whitepaper for Accountants - Halo Financial

Economy & Finance

Transcript of Currencies Transfer Whitepaper for Accountants - Halo Financial