How currency moves can work in your favour

Construction materials company Everbuild has struggled to expand its export market over the past decade, but as the pound has plunged against other major currencies over the course of the credit crunch things have looked a lot brighter.

‘We’re now selling in Holland, Germany, France and Belgium,’ says MD David Seymour, who adds that Everbuild’s export sales are up 60 per cent to £5 million. ‘It’s also given us a chance to recreate our business in the Caribbean and the Far East, where we had become uncompetitive.’

Clearly, currency moves can cut both ways and it is dispiriting to think that export growth may rest on an unpredictable factor over which you have no control. Seymour is philosophical about this: ‘Once we have established a customer base in a country, there is every chance, even if we become not quite as competitive, that there will be residual demand for our products.’

According to Mark O’Sullivan, a director at foreign exchange specialist Currencies Direct, small and medium-sized enterprises (SMEs) often ignore the issue of currency, even at a time when they are scrutinising every other way of preserving margins.

Fortunately, tools to mitigate currency risk are becoming more widely available, O’Sullivan adds. Forward contracts allow you to lock in a price when you know you are buying or selling in another currency on a set date in the future, while options are more sophisticated and are effectively “insurance” against currency movements.

The downside of forwards is that you will be committed to going through with the deal on the day or lose a hefty deposit. Options allow you not to follow through if the currency movement goes in your favour (hence the name), but as with all financial products, that flexibility comes at a price. ‘Options are used all the time by big corporates, and they’re just filtering down to SMEs,’ says O’Sullivan.

But many are still sceptical. Seymour says he will pre-buy currency if he knows he is making a purchase in six months’ time and the exchange rate is favourable, but he remains unconvinced of the benefits of more complex financial offerings. ‘In general, if banks are offering a product, there’s a margin in it for them,’ he says.

He does add one word of caution. ‘If you’re giving long credit terms to your customers, say 60 or 90 days, that’s when you need to pre-sell or pre-pay the currency. Otherwise an adverse move could wipe out your margin completely.’