Exchange rate protection
There are a number of alternatives available to
protect against adverse movements in the exchange rate. Some can be
intrinsic to your existing operations and available at no cost.
Others are financial products available from banks and other
When considering the extent of your exposure to
exchange rate movements, it is important to take offsetting cash
flows into account. For instance, any foreign currency expenses will
offset your exposure to revenue in that currency.
‘Forward’ exchange contracts
Most people are familiar with the regular
currency conversion transaction at the bank, where the bank will
make a T/T payment in foreign currency, which will arrive at the
receiving bank account in one or two days time, and debit your
Australian Dollar account.
It is also possible to arrange to fix the rate for
a conversion, but not physically effect the payments until a future
date. So while the rate can be fixed today, the foreign currency T/T
and the Australian dollar debit may not happen until some
pre-arranged date in the future. These ‘forward’ contracts can
generally be arranged up to 1 year ahead.
Using these contracts, it is possible to exactly
fix the exchange rate that will be used for your currency
conversions for a period of time, and remove all exposure to
movements in the exchange rate.
Financial institutions offer products to insure
against adverse exchange rate movements. These provide the purchaser
with the potential to benefit from exchange rate movements in their
favour while offering protecting against adverse movements.
There is no free lunch of course and this type of
insurance comes at the cost of an up-front premium. This can be in
the order of 5% of the amount involved for protection against
adverse movements for 12 months.
There are many more alternatives available that
can be tailored to your specific requirements. An example is a zero
cost insurance strategy that allows you to benefit from a certain
level of protection against adverse movements by giving up some
profit potential from beneficial exchange rate movements.
We would be please to discuss your individual
situation with you and work out if we can be of assistance in your