Forex Turmoil

Forex uncertainty increases as the UK comes closer to its departure from the European Union. Recently, we have seen the Sterling rate on a rollercoaster ride against the US dollar and the Euro, evidenced in the recent devaluation of the Sterling rate against the two main currencies (US dollar and Euro) used by the majority of the UK organisations which carry cross-border businesses.

The Sterling devaluation creates uncertainty to finance professionals since goods or services purchased under a foreign currency (especially US dollar and Euro) will have an increase cost due to Forex.

The day before the Brexit referendum, on 23rd June 2016, the Sterling was €1.30. A couple of days after the Brexit referendum, this was reduced to €1.21. At the last day of December 2018, the sterling was as low as €1.11. The same applies to the US Dollar which from a high value of US$1.40 in April 2018 was reduced to US$1.27 at the end of December 2018.

All organisations should have a currency policy in place in order to manage their currency risk. A currency policy can enhance the internal control of the organisation against Forex uncertainty. The policy does not have to be long but to set out how a company will deal with certain movements in exchange rate. The policy should also detail the level of risk or exchange rate fluctuation that the organisation can tolerate.

Assuming your organisation has a currency policy in place what are the options available to hedge against exchange rate risk. There are a number of options available, but the general rule is to hedge certain foreign currency cash flows with Forwards, and uncertain foreign cash flows with Options.

Please speak to your Barnes Roffe partner if you would like to know more about this.

 

Blog written by Konstantinos Christoforou

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