Whilst the same process can be used for the purchase of a USB stick as for a combine harvester, the strategy and treatment of currency exposure faced by a rural or 'agri' business buying and selling stock, as opposed to a sizeable asset, is nuanced.
You wouldn't be considered foolish for paying for a pencil with coins, but you might buy a car on credit...so, why consider all currency transactions in the same way?
There are a couple of things that come into play when considering a large purchase...the first is depreciation.
You need to factor in things like 'how long', 'how frequently' and 'for what' you are going to use the machinery for.
Do you intend on selling your combine or tractor in a couple of years and how do you plan to prepare for so doing? Do you think you will want to sell in the same way you've bought and is there a market locally for what you will have to sell in a couple of years, or do you to need to look further afield?
When it comes to currency transactions, unlike with the management of a stock portfolio and the good sense in diversifying your exposure in that context, breaking up your exchange into smaller more manageable chunks does not your downside exposure reduce.
A diversified stock portfolio relies on the fact that you are holding positions in complementary or synergistic asset classes and instruments.
With currency you are only ever dealing in one asset class...therefore, every transaction, no matter it's size, carries with it the same level of exposure as ones executed previously and ones that may be executed subsequently.
We will never refer to them as advantages, but, one of the notable things about breaking a large volume transaction up in to smaller ones is that each transactions has as much chance of being executed at a higher rate. This means you might have nine chances of getting a rate higher than the previous one you secured if you break up £100,000 transaction in to £10k blocks.
Now, the reason this is not an approach we would actively counsel in favour of, and the reason it is not an 'advantage', of is because there is just as much chance of the rate being worse for subsequent transactions.
If you know more than we do and can confidently predict a rise in a rate of exchange then we will happily pay you for an explanation as to how you can be so sure.
So, for a business, a large acquisition such as the purchase of machinery does not benefit
from the same sort of approach you might take to other assets the business acquires.
For one thing you might be working with your bank or a third party to finance a purchase of this size.
Depending on the terms you reach with both lender and vendor, the appeal of products like the 'forward' currency contract is higher or lower and the benefits more or less valuable.
Generally we would always counsel businesses in favour of using a forward contract.
Now, there are two schools of thought as to their merit in circumstances like the above.
On the one hand, a forward enables the business to fix and cement the local currency achievable once the finance is released by the lender (or indeed if the purchase is being conducted with cash, the same is true).
Being able to say 'come what may, rise or fall, I have locked in an exchange rate that means I can buy this tractor' is a good thing.
The downside is that if the sale does not go through or complete, the business has committed contractually to a currency exchange that never needs to go ahead.
This is one of the risks of being so prepared and of locking in your rates before being totally and truly committed to a purchase - what happens if the purchase falls through?
The notion that your buying of a tractor, combine-harvester, train or trailer from abroad might not reach completion is a perfectly reasonable one, but, if we assume that you have no reason to think it will collapse, forward buying is a sensible thing to do.
In this sort of matter, depending on the extent to which you're financing the purchase yourself or whether you're borrowing money from someone else (still all as a business of course), the way to approach exposure and the way to, at the very least, mitigate the effects of changeable rates, are unique to your plans, liabilities and objectives.
You cannot pluck an off-the-shelf solution...off the shelf in the hope that it might just be the suitable for the specifics of your matter. You have to go down the bespoke route and, although you might use some Over-the-Counter tools, the overall solution needs expert attention in order to ensure nothing is missed and every aspect is optimised.
The reason we started by talking about your intentions with regards to the duration of use of the machinery etc. is because the European resale market is a strong one.
Depending on the relative value of the pound, something we can and would happily advise on, you can fix, maximise and extend your access to a 'good' rate of exchange for anywhere up to two years, which, given your motivation, should be long enough to find a buyer for your wears, machinery wise.
Granted, this isn't something someone buying a piece of kit like a tractor is thinking about from the off per se, but, it is certainly something that warrants and benefits from attention.
Prime Cap can ensure a razor sharp rate and easy, quick and reliable settlement and payment processing tools, but, more than that, our team know how to structure payments of this type.
In the very same way that you might sell grain forward or hedge your single farm payment (for as long as that is likely to continue) we can aide in the considered management of exposure and payment activity relating to far bigger purchases with multiple financing stakeholders and a variety of settlement options.