Managing currency risk for travel businesses in a Covid world

 

Know Your Risk 

Understanding the currency risks that can affect your business allows you the ability to plan, mitigate and protect. In the Travel sector this is even more difficult to predict. 

Nobody knows what will happen now or in the future. With numerous external factors impacting the direction of currency markets, it can be tempting to leave these risks unattended. Even though it may be more difficult now to protect themselves, travel businesses ignore these risks at their peril as adverse exchange rate movements can lead to sizeable and avoidable losses. With more tools and resources at your disposal than ever before, is it worth investigating further?

Normally there are 4 key factors that lend themselves to a robust understanding of your risk: 

  • Timing – when do you need to exchange one currency for another? 
  • The amount – how much are you exchanging (even small FX movements can disproportionately impact profitability). 
  • Margin - what is your profit margin? 
  • Forecasting – accuracy of your forecasting will support the appropriate management of your business’s currency issues and improve financial health. 

In the travel world there are two more factors for consideration. The first is how uncertain the future forecast is and deciding what that is takes expertise and guidance. Secondly holidaymakers are much more likely to cancel than ever before, so the risk of being over hedged by being too positive is a very real risk in our world. 

The Best Rate 

The best rate today may be a bad rate tomorrow. Fortunately, armed with the right knowledge, tools and tech, a moving target is not too hard to hit. The best rate is rarely one fixed number. For example, agreeing on a rate for a 12-month contract in America may be favourable initially but external factors such as Brexit, Covid-19 and political and economic events can wreak havoc further down the line. This is not uncommon. Variable external political and economic factors affect currency trades continually. The best rate is about understanding what’s right for your business including your people, industry, objectives, and risk appetite, as well as understanding what moves the market. Timing is essential when deciding how much to book and how long for. With a mixture of hedging solutions to choose from and technology on your side, you can (literally) trade in your sleep and secure the best rate based on your needs. 

International Payments Service 

FX is notoriously challenging to manage. The integrity of spreadsheets quickly declines, and they are difficult for finance teams to update. Understanding new exposures, updating transactions, sending international payments, multiple currencies, paperwork presentation, fees, and intermediaries means the margin for error is high. A service provider has the time, tech, and knowledge to manage your international payments as per your needs. They will also hold intuitive knowledge of the international payment’s framework. You may require a proactive service, a prompt reply on email, a dedicated account manager, or all the above. 

An expert can advise on what tools will help to protect your profits and allow for greater and more accurate financial planning. Also, having a secure online payments portal keeps the complex simple, allowing you to get on with running your business. Integrated, live, and accurate – a secure payments portal provides updated FX positions, current FX cashflows, seamless integration to the liquidity provider of your choice, expert digital consultancy, integrated accounting, and reconciliations, and more. Businesses of all sizes are ditching the spreadsheets and understandably so. 

Strategy 

FX conversions are controllable expenses and not simply a business storm to weather. Managing your business’s currency risk affords peace of mind and ensures you have an appropriate currency hedging strategy in place. Hedging can strengthen your organisation and protect you from the sharp swings of currency fluctuation and quite simply help you do business for less. Your unique strategy is guided by your business and utilises in-depth knowledge of the external factors that move the markets. Business owners and financial controllers are responsible for financial health and there are concrete steps that can easily limit the impact of currency fluctuations that will impair the company’s performance.

Spot transactions are an agreement between you and a second participant to buy and sell, respectively, at the current market value and to usually settle the transaction 1-3 days later. Forward contracts allow you to secure a fixed rate for the future and yield far greater control of your budget. There are plenty of hedging strategies for you to choose from, that are purpose-built to reduce your risk. In a covid world it is even more difficult to find the right strategy and it almost needs external expertise to help decide what the strategy should be. Also because of Covid uncertainty, businesses need to constantly review the plan monthly or weekly as things change so quickly and that means they need to make new decisions all the time. Making these decisions is stressful and in a normal world would take weeks or months of meetings to decide a strategy that would be reviewed 6 monthly but in the travel world things change daily. It might suggest the need for a closer working relationship and the teamwork between external consultants and the travel business. 

Credit Terms 

Variation margin is essentially the amount of money that you need to put forward to place a trade and maintain its position. It is referred to as variation margin as the amount varies from case to case. The amount of margin is usually a percentage, of the amount of the size of forex positions and will vary by forex broker. 

Margin means trading with leverage and can increase risk and potential returns. It is vital that you understand the terms of your account before entering any trade. Your trade setup, trade trigger, the stop loss, the price target, and the reward to risk ensure that your trades align with your currency risk strategy and trading style. 

A profit margin, however large or small, can dwindle quickly when faced with sharp, unfavourable currency swings. The correct credit terms are another ‘must’ as they can smooth out your payment and trading terms. For example, if it takes days to receive funds across the globe, your delivery schedule may increase and leave customers frustrated. The FX market is open 24-hours a day, 5 days a week, in major financial centres around the world. 

Mind plays an essential part in managing your currency risk and a currency hedging policy affords your business with a level of certainty that cannot be found elsewhere. Peace of mind plays an essential part in managing your currency risk and a currency hedging policy affords your business with a level of certainty that cannot be found elsewhere. In the travel world many may have been afforded the luxury of 0% deposits when booking forwards especially through their bank who hold the company’s funds. In the past 18 months travel companies have been one of the most affected sectors. The climate or future outlook is also still somewhat uncertain and so it adds up to them not being as credit worthy. Therefore, they may find themselves having to pay deposit for the first time if they seek external expertise the banks do not offer. This then opens up risks on their side, which they may not have had in a normal world. It is important to find the right strategy and execute it more efficiently. It may be important to input a review process monthly or more often. It may also be a wise decision to have an outsourced consultant, driven by building strong relationships and excellent service when helping to manage your currency risk, where in a normal world this may not have been necessary. 

This article was written by Central FX. www.centralfx.co.uk / Travel@centralfx.co.uk