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Reduce your FX Risk on Future Payments

If your business Imports or Exports, then you are exposed to exchange rate risk.

Whatever industry you’re in, volatility in the foreign exchange market could be disrupting your cash flow, complicating your forecasts or even worse, eating into your profits.

More and more South Africa SMEs are discovering the advantages of using Forward Contracts to manage their currency risk. Using currency hedging tools, you can secure and hold an exchange rate for future dated payments, in doing so, you’ll know exactly what your payments will cost upfront and avoid any unexpected downside movements in the currency market.

Through experience, we have found that most South African businesses only use spot contracts and generally tend to pay for things only when they fall due. Its not wrong to do this but it does mean that the business is potentially exposing itself to far more risk than it should be. It also puts more pressure and responsibility on the financial managers to cost things properly and monitor exchange rates more closely.

In reality, most South African businesses stay away from Forward Contracts because they don’t understand how they work or what they are designed for or because they have used an FEC in the past and it turned out to be a bad decision.

Forward Contracts

Our view on Forward Contracts is simple, they are designed to reduce the risk in times of uncertainty. They should only ever be used when the client has evaluated the market and determined that the chances of the rate deteriorating outweigh the likelihood of it improving. In other words, the risk outweighs the reward. In times of uncertainty, you can build certainty back into the equation by securing the rate upfront.

The key is start with an evaluation of current market conditions and then make a decision based on your view of the market in relation to your timescales. If you find that you are unable to make a decision because you don’t have enough information about the market, then it might be worth speaking to an expert like FX-PRO.

Cash flow can be a real challenge for small businesses, what a lot of people don’t realise though is that hedging often allows you to bring your cash flow under control. The benefit of an FEC, you can secure the exchange rate upfront, simply by putting down a 10% deposit. With an FEC, you’ll know exactly what you need to pay and by when.

If you would like to discuss the mechanics and benefits of buying currency forward, then get in touch with us today. Our experienced and friendly team can guide you through the process of using FECs to manage FX risk.

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