This guest post is courtesy of Assure Hedge, an early stage Irish based startup providing a web based plaftform, designed to better manage the risk exposure of currency fluctuations.
There is an apocryphal Chinese curse that goes: “May you live in interesting times”. While the authenticity of the source has been disputed, the reasoning for “interesting” to be equated with misfortune has been made obvious over the past month.
The referendum result threatening the departure of Britain from the the European Union has come as a shock to almost everyone, with those who campaigned for the Leave camp seemingly the most bewildered. Within minutes the pound was undergoing a massive devaluation, fuelled by traders desperate to dump a currency polluted with the spectre of the unknown. For traders operating across currencies uncertainty implies risk and risk implies losses, an additional burden lumped onto the cost of all international business.
Brexit Brings Uncertainty to the Currency Markets
Over the course of the past month the exchange rate has failed to stabilise to an acceptable level, and the abnormally high daily fluctuations can be the difference between a profit and a loss for low-margin transactions. The ongoing reshuffling of the upper echelons of British politics has done little to restore a sense of normalcy, with the new Prime Minister Theresa May refusing to be led into a concrete statement about the activation of Article 50 and lingering questions over the future status of Scotland and Northern Ireland in a post-EU Britain.
The drawn-out process of EU negotiations ensure that this unpredictable state of affairs will persist well into the near future. These interesting times are proving lousy for business, both inside and outside the British markets.
Uncertainty seems certain to stay, which provides problems for Ireland’s economy where exports to Britain comprised 17% of our total exports last year. Irish traders are being exposed on an alarming scale to the volatility of the Sterling exchange rate, making it impossible to predict the real worth of their incoming payments from day to day. This increases the effective cost of their operations and eats into profit.
The Food, Agribusiness and Beverage Risk Insights Survey 2016 listed exchange rate fluctuations as the biggest risk to this valuable Irish food sector, with only a fraction of the surveyed companies having taken any steps to prepare for this risk.
Traditional methods of minimising this exposure involves the creation and purchase of foreign exchange options or forwards. Options are agreements to complete a transaction at a future date using an agreed rate (the “strike price”), no matter the subsequent exchange rate movements. The buyer is not obligated to exercise the option, allowing them to gain from positive rate changes and effectively mitigate the effects of any adverse developments.
Forwards are similar, but the buyer is locked into a set contract without the flexibility of an option. Unfortunately, many Irish SMEs rely on forwards issued by a bank as the only hedging method available, since they don’t have the liquidity necessary to operate on the forex markets independently. They often are not in a position to negotiate a favorable deal and the forward contracts are time-consuming to arrange, generally taking a minimum of seven days to purchase from major banks. For a company in a fast-paced industry this is often an unacceptable roadblock to securing adequate coverage and most Irish companies are exposing themselves to unnecessary risk.
Minimising Currency Risk with Assure Hedge
While the problem of volatile exchange rates is an old one, the advent of better technology has led to a new solution. Assure Hedge is an early stage startup designed to automate and simplify the process of insulating exposure to foreign exchange fluctuations and safeguarding earnings. Assure Hedge works by using proprietary algorithms to instantly calculate and procure the most efficient combinations of risk-management instruments using our top-level access to the world financial markets.
The web-based platform can instantly offer a quote based on currency, amount and length of time the money is at risk. When covered this way any incoming payments are guaranteed to never depreciate, while still retaining the option to claim a windfall from any positive rate changes.
Overhead, middle men and red tape are bypassed, making Assure Hedge both cheaper and more flexible than antiquated hedging methods. Your business is then free to focus on securing deals, no matter where or when, safe in the knowledge your earnings are being protected.
It doesn’t take a crystal ball to foresee that these interesting times will continue into our near future. Post-brexit talks, commodity price excitability, terrorism and instability in the Middle East will continue to have undesirable knock-on effects on the foreign exchange markets. The only certainty is uncertainty, but with Assure Hedge this fluidity doesn’t have to be scary. With quick, easy and affordable risk management, interesting times can be a manageable