Whilst volatility is an analytical term based on deviation and statistics (for the most part), when it comes to rates of exchange and exchanging one currency for another for whatever reason, volatility essentially means unpredictable change in rates.
Volatile rates of exchange can be good or they can be bad for businesses and individuals, it rather depends on what currency you want to 'sell' and what currency you want to 'buy'.
So, given that you can be either positively or negatively affected by volatility in the currency markets, we look briefly at some simple ways to mitigate the effect of such unpredictability in rate movements and to protect the value of the currency you hold as far as possible.
1 Identify what rate of exchange achieves an acceptable margin for you and your business. If you import items from abroad which you then sell in the UK, your margin will move up or down with the rate of exchange.
By eliminating your exposure to that rate movement you can fix your notional margin for anywhere up to 18 months. This is done by using a what is called a 'forward contract'.
Yes, cash flow will determine you ability to use this type of contract (and for how long) but, when 5-10% could be added to your costs within just 6 months simply because of movements in rates of exchange, putting aside a lump sum that enables you to secure a forward contract is something worth considering in earnest.
When you have established the rate of exchange you need to aim for, or the one that enables you to achieve an acceptable margin, you can begin to devise a set of rules that will effectively refine and hone your approach to your payments activities.
2 Take a breath and work out precisely what a drop in the value of the currency you hold would mean for your business and, in discussion with your broker, establish whether there is any sense in delaying your exchange until waters calm.
Whilst you may be considering paying the invoice sat in front of you, and headlines and dinner party chatter has perhaps given you concerns over where the rate of exchange might end up and thusly how likely it is you may have to pay more, talk to someone who can expressly quantify what it might cost you.
Prime Cap can quantify potential upside as well as downside. Availing yourself of an understanding of these may assist you in cutting through the rhetoric and innuendo.
3 Plan ahead.
It is never too early to speak with a currency specialist about how sharp and unpredictable changes in rates of exchange might affect you.
Do remember, volatility can be both positive and negative. Volatility simply means movement up and down and an inability to assuredly predict where a rate might end up. It is essentially instability and this can be good as well as bad...so, have a plan.
Your broker should be able to talk you through what rate it might be reasonable for you to 'aim' for and also what rate is sufficiently undesirable to, if approached or hit, warrant you to strongly consider, if not act to, cut your losses...if indeed you're minded so to do.
Again, your broker is not there to tell you where the rate will go, but, an experienced broker should be more than willing to lend you their views on what is reasonable to expect based on the circumstances that prevail and to play-out ranges and results with you.
We've often been told that one of the most valuable things we can do is to emphasise the value in speaking with a currency specialist.
As a broker we tend to angle towards inviting customers to engage our services over those of another, but, true confidence in the value of one's role is most effectively and definitely displayed when one steps out of the pitching ring and simply lends one's voice to endorsing a concept.
We do not mind if you do not engage Prime Cap, but, we know it to be true that you will be best equipped to weather, deal with and in appropriate circumstances capitalise on movements in rates of exchange by speaking with a specialist currency company rather than relying on the reactionary and sub-par platitudes of your high-street bank.