Managing Foreign Exchange Risk

Managing Foreign Exchange Risk

Danske Bank Markets in Northern Ireland
The following is for information purposes only to help you decide whether or not it is appropriate for your business to hedge any potential foreign exchange exposure. This information does not contain any form of investment, tax or legal advice. It does not amount to investment advice or make any recommendation in any financial instrument, investment or product. It is not intended as an offer or solicitation. Before deciding whether or not to enter into a foreign exchange risk management solution, we recommend that you take independent financial advice. Spot transactions and forward transactions when used to cover a commercial position are not “designated investments” as defined in the Financial Services and Markets Act 2000 (the Act) and therefore do not benefit from the protections of the Act or the rules of the Financial Conduct Authority. Currency options, even when used to cover a commercial position, are "designated investments" under the Act.​​​​

​​​If you’re involved in cross-border trade or have business or other interests in a non-domestic currency, you may have a foreign exchange exposure to manage. Danske Bank Markets in Northern Ireland can help you to identify and to manage the foreign exchange risk arising from this exposure.​

Identify and Understand the risk

Foreign exchange risk can arise for a number of reasons and it is important to identify and understand just where such risks can come from. Factors to take into account include: 
  • What currencies are involved? 
  • When does the risk arise, for example, when you agree a price with a foreign supplier? Or when you take delivery of the goods?
  • What impact will adverse movements in exchange rates have on your profitability, for example, if you had expected to convert a payment from a customer of €100,000 and receive £80,000 but when you actually convert you receive only £78,000? Does this make the venture unprofitable? 
  • What are your future plans – will the level of cross-border or overseas business increase or decrease? 
When you have a good understanding of the foreign exchange risk, the next step is to understand the solutions available to help you manage that risk. ​



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Understand the solutions

There are a number of solutions available to help you manage your foreign exchange risk. If you transact any of the products below, you will be entering into a legally binding contract with us, and you will be committed to settling the contract, even if the underlying business transaction falls through. You may need to enter into a Master Agreement with us before transacting.​​

​​Spot transaction 

This is where you buy or sell your foreign currency in the spot market, that is, you act on the day you need to make the conversion and use the rate available at that time. Delivery is normally two business days later, although same day and next day delivery is available in some currencies. Whilst simple, this approach means that you will not know in advance how much sterling you will need to pay or will receive. If the market moves favourably you will be able to participate in 100% of that favourable movement, but if the market moves adversely you will have no protection.​

Forward transaction

This is where you pre-agree a rate at which you can buy or sell your foreign currency at an agreed future date (or during an agreed period). This will give you certainty as to the rate you can convert at and offers 100% protection against adverse movements, however, it does not allow you to benefit from any favourable movements. There may be a cost to cancel the contract, depending on the foreign exchange rates prevailing at the time.​​

Currency option based solutions

We offer a range of packaged currency option based solutions that use the concepts of protection and participation to give you certainty about the worst case rate you can use to convert your foreign currency, but will also give you the ability to benefit from a more favourable rate under pre-agreed conditions. The downside is that the worst case rate may be less favourable than the equivalent forward contract rate. ​

We may need to obtain sufficient information from you to enable us to assess whether currency options are appropriate for you before we can enter into a transaction with you.​​ If a packaged currency options transaction is settled prematurely a loss could be incurred due to the change in value of the factors making up the price of the structure.​​
 
 
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Devise a strategy

When you have a full understanding of the risks and the available solutions you are in a position to devise a strategy for your business.

Implementation and review

​​Once you have devised a strategy you are happy with, and identified the solutions most appropriate to your circumstances, you can then put the plan into practice. As with any business strategy, your foreign exchange risk management policy should be periodically reviewed to ensure it continues to meet the needs of your business. This is particularly important in times of change, for example, when you begin trading with new counterparties, or win new contracts.​​

Summary​

The foreign exchange markets can be volatile and unpredictable. While you cannot control the market, you can control the effect it has on your business.​​

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*Lines are open 8am to 5pm Monday - Friday except for bank holidays or other holidays in Northern Ireland when the bank is not open for business. We may record or monitor calls to confirm details of our conversations, for your protection, to train our staff and to maintain the quality of our service. ​
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