How does foreign exchange affect your business
11 November 2019

In an age of globalisation, expanding into international markets can be an effective way to accelerate business growth.   

Businesses move overseas for a number of different reasons; to expand and generate more revenue, compete in new markets, reduce costs and access new pools of talent. This is a natural progression for growth and success for companies with varying business models.

However, international expansion may leave a business exposed to one of the most liquid and volatile markets in the world. Foreign exchange is the largest financial market in the world –  over 60 times bigger than the stock market. The 2016 Triennial Central Bank Survey of FX and OTC derivatives markets showed a daily volume of $5.1 trillion (USD) for the foreign exchange market, compared to $84 billion (USD) of equities traded globally.

The FX market is notoriously hard to predict, given the uncontrollable variables that affect currency markets. The risk list includes geopolitical issues, global and domestic economic performance, central bank policy and speculative trading. In this day and age, even a  tweet generated from @realDonaldTrump can have a significant, and immediate impact on global currencies

You only need to look at the impact of Brexit has had on the British Pound (GBP) since 2016 to see the FX market’s volatility and how it can influence a business. Over the last three years, Sterling has lost around 20 percent of its value against the two main indicators, USD and EUR, largely impacted by Brexit’s political uncertainty.

This monumental swing in currency price highlights the need to mitigate currency risks when trading overseas.

For a company importing products to expand their product range and reduce costs by capitalising on cheaper production costs, a swing in currency price can impact on pricing and profit margins. With a 10 percent profit margin, even a two percent move in the currency price can wipe out 20 percent of a company’s profits.

 

 

Pre-referendum exchange rates of EUR to GBP (see graph above; 1.40 January 2016 compared to 1.15950 (30.10.2019) would mean around a 20 percent difference in the price paid for the imported goods at today’s rate. Such dramatic swings in currency value are becoming more prevalent and can seriously compromise a decision to trade overseas.

With the appropriate budget, FX policy and hedging strategy in place a company can alleviate the impact of FX fluctuations and safeguard profits against volatility. The first step to achieving this is learning how to budget for FX in your business.

How does foreign exchange affect your business
11 November 2019

In an age of globalisation, expanding into international markets can be an effective way to accelerate business growth.   

Businesses move overseas for a number of different reasons; to expand and generate more revenue, compete in new markets, reduce costs and access new pools of talent. This is a natural progression for growth and success for companies with varying business models.

However, international expansion may leave a business exposed to one of the most liquid and volatile markets in the world. Foreign exchange is the largest financial market in the world –  over 60 times bigger than the stock market. The 2016 Triennial Central Bank Survey of FX and OTC derivatives markets showed a daily volume of $5.1 trillion (USD) for the foreign exchange market, compared to $84 billion (USD) of equities traded globally.

The FX market is notoriously hard to predict, given the uncontrollable variables that affect currency markets. The risk list includes geopolitical issues, global and domestic economic performance, central bank policy and speculative trading. In this day and age, even a  tweet generated from @realDonaldTrump can have a significant, and immediate impact on global currencies

You only need to look at the impact of Brexit has had on the British Pound (GBP) since 2016 to see the FX market’s volatility and how it can influence a business. Over the last three years, Sterling has lost around 20 percent of its value against the two main indicators, USD and EUR, largely impacted by Brexit’s political uncertainty.

This monumental swing in currency price highlights the need to mitigate currency risks when trading overseas.

For a company importing products to expand their product range and reduce costs by capitalising on cheaper production costs, a swing in currency price can impact on pricing and profit margins. With a 10 percent profit margin, even a two percent move in the currency price can wipe out 20 percent of a company’s profits.

 

 

Pre-referendum exchange rates of EUR to GBP (see graph above; 1.40 January 2016 compared to 1.15950 (30.10.2019) would mean around a 20 percent difference in the price paid for the imported goods at today’s rate. Such dramatic swings in currency value are becoming more prevalent and can seriously compromise a decision to trade overseas.

With the appropriate budget, FX policy and hedging strategy in place a company can alleviate the impact of FX fluctuations and safeguard profits against volatility. The first step to achieving this is learning how to budget for FX in your business.

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