One of the trickiest aspects of trading for any retailer with an international arm is selling the same products globally and in multiple currencies.
Global currencies have fluctuated significantly in the past twelve months, and financial forecasts suggest that these fluctuations are only set to continue. What’s more, rising commodity prices and pressured or severely reduced consumer incomes will also put a tight squeeze on the profit margins of those operating within a retail environment.
The fact is that as the currency rates in your different trading regions shift, you could end up with significantly less profits from your products than you expected. However, there is a solution that will allow you to lock in today’s exchange rate, and use this as your trading figure for years to come:
Understanding Currency Forward Contracts
Currency Forward contracts allow retailers to buy or sell a currency pair for a future date: effectively, you can guarantee the forward exchange rate that will be received at the time you want to make the transfer. With a forward exchange contract, you guarantee the current exchange rate for the future, meaning that you can fix the rate now (whilst it is favourable) and set your retail prices accordingly.
If you choose to fix your FX forward GBPEUR rate, for example, then you can protect against the uncertainty the the UK’s break from the EU will have on the markets, and ensure that your future trading continues at the same rates as it does today. They are a medium to long term solution, as you can choose the length of time you wish to fix your currency exchange: for all major currency pairs you can secure an FX forward contract for up to one year, and for the biggest markets (GBP/USD and EUR/GBP, for example) it is possible to fix your exchange rate for a period of up to five years, or even longer in some cases. This will give you peace of mind that the rate you fix on today is the rate that you will trade at for the fixed period of time that you set.
A Small Business Solution
Many small retailers steer away from complex financial derivatives, seeing something like a FX forward contract unnecessarily complicated, or something they don’t consider being aimed at a business of their size. But the fact is that the current retail environment as just as pressured for small retailers as it is for large ones: in fact, it may be more so. And as society increasingly shifts towards online shopping, if your website is unable to trade worldwide then you are going to see that your website, and therefore your whole operation, loses out in what is increasingly global market demand.
The reason for this reticence? There is often a lack of understanding about the extent of currency risk faced by retailers. But fixing your exchange rate with a forward exchange contract can help you not only to ensure you are maintaining consistent profit margins when selling your goods, but also fix the rate at which you are paying for your supplies and raw materials; essential if these are coming from outside of the UK. There are many industries that come to mind, but this would be particularly beneficial for those working in fashion, or food and drink retailers who are shipping in fabrics or edible goods from the EU and beyond on a regular basis.
What’s more currency forward fixing is a solution for the long-term, and can save you extra work load in the long run too: with your exchange rate fixed, you are in a position to set your prices for the entire season, safe in the knowledge that currency fluctuations won’t eat into your profit margins. That means that rather than having to access your pricing structure on a weekly basis, you are free to spend your time doing other things, such as sourcing new products, new profit steams, or otherwise growing your business.
The main benefits of fixing your currency rate for retailers (both large and small) is that it reduces the risk of trading in multiple currencies for your business. You can lock in profits on any foreign purchases or transactions, and make sure that these never cost you more than the current exchange rate: choose to lock in when the exchange rate is favourable to the Pound, and you can reap the benefits of this throughout 2021 and beyond. Monitoring the exchange rate, therefore, is wise before you fix your currency rate, to ensure that you secure the best rate possible.
Of course, whilst this does mean you could miss out on the exchange rate moving in your favour, because you have already locked in your rate, in these uncertain times (and particularly with Brexit and the current Covid crisis causing financial uncertainty within the markets) unless you are a real risk taker, it makes much more sense to lock in your exchange rate at a time of security, enabling you to make your future financial plans.
Why Aren’t More Retailers Utilizing FX Forward Fixing?
A question that often arises when discussing FX Forward Fixing, particularly with smaller retailers, is that if it is such a clear solution, why isn’t it one that more retailers are utilising. The answer to that, in most cases, is two pronged and fairly straight forward:
- Firstly, most small businesses are simply not aware that the option of FX forward fixing is available to them. As discussed above, if they are aware of the concept of FX forward fixing at all (and many aren’t) then it is likely that they consider this to be something that large, multinationals do rather than something that is available to them.
- Secondly, many small business retailers are simply afraid of being scammed. Complex financial derivatives are often the subject of ‘spam’ emails, leaving many individuals feeling suspicious of them.
But Forward Exchange Contracts, when used properly and purchased via a legitimate source, are actually a very powerful tool and one that is ripe for use by small retailers. They can reduce currency risk significantly, and although there is a cost involved in securing this, the costs involved are usually relatively low. Effectively, and in the simplest terms, FX contracts enable retailers to agree to purchase and use today’s exchange rate for a point in the future: this means that they can budget their finances much more effectively for the year ahead, and crucially, minimise any impacts from unknown elements (such as Brexit).
Managing your currency risk is no small challenge, and as retail continues to globalize, it is a problem that will only become more apparent. But fixing your currency rate is a clear solution to this issue, and one that is very easy for retailers, of all sizes, to adopt. It is proactive, sophisticated, and popular: and something that is forecast to only increase in popularity over the next twelve months.