One of the biggest issues for Irish companies since the Brexit vote is the sharp fall in GBP, meaning those exporting to the UK are receiving less than before when they convert earnings into Euro. Volatility in the FX markets is an ever present challenge for financial managers who are trying to minimise the impact that movements in FX rates can have on their core business. Companies need to consider tailored hedging strategies that meet their financial objectives within their risk parameters. As the UK is our largest trading partner, many Irish companies are actively engaged in the UK market therefore, all of these businesses have a natural exposure to the EURO/GBP fluctuations which creates significant additional financial risk that must be proactively managed. Volatility is a constant feature in all FX markets but the impact of Brexit has created an additional source of uncertainty that has been with us over the last 12 months and is likely to continue for some years.

The graph below shows the movement in the EURO/GBP rate over the last few years from a low of .7000 in Dec 2015 to a high of .9200 in Oct 2016 with the rate currently trading at approximately .86 00. This 30% range over the 10 month period demonstrates the real challenge that exporters and importers face when trying to negotiate contracts with their UK trading partners. Companies that operate with a treasury policy can benefit from actively managing their exposure. The benefits of managing this exposure include raising awareness throughout the company, particularly at board level, of the foreign exchange risks that are present. This will lead to decisions on an appropriate strategy to manage these risks which have the impact and support of all stakeholders. The reality is that nobody can predict where the market will be in 6 or 9 months’ time but by proactively hedging FX flows companies can significantly reduce the impact FX volatility will have on their businesses. An FX specialist may be ideally positioned to work with companies as they formulate the most effective hedging strategies to manage the FX volatility that poses a continuous challenge for Irish exporters and importers.
Market Quotes by TradingView

A treasury policy may suggest the following alternatives:

 

  • Do nothing – continue to manage the foreign exposure by using the spot market.
  • Hedging the exposure through the use of forward contracts over a 12 month time horizon.
  • Consider the use of foreign exchange options. You may consider some with upfront premium and others that can be tailor made zero cost structures.
  • Foreign currency bank accounts.
  • Blended approach using a % of the above solutions in managing the exposure.
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