Overseas trading and currency risk avoidance - Business Works
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Overseas trading and currency risk avoidance

by Eve Watkins We live in an ever-smaller world. Thanks to the internet and a relaxing of many import and export rules, trading overseas is no longer just something in which large companies and multinationals are involved. Even for a small business, selling overseas trading can be a crucial revenue stream, while buying from overseas can generate big savings. However, one aspect of overseas trading must never be overlooked - currency exchange.

Because exchange rates fluctuate, it can make financial forecasting incredibly difficult if you are trading in foreign currencies. Furthermore, while you may offer a competitive price to an overseas territory for a certain period of time, a change in the exchange rate can result in you becoming uncompetitive overnight, resulting in a loss of sales, which will leave any profit and loss forecast in tatters.

Selling overseas

Selling overseas is pretty straightforward. You set your price based in the currency of the country in which you are based, such as sterling, and any fluctuations in exchange rate are taken into account in the price you charge your overseas customers. As mentioned, if the exchange rate changes, you may find you suddenly become uncompetitive. However, it may only be temporary, so you should never rush into adjusting your prices, as you may scare off your potential customers unnecessarily. It is therefore, essential you keep an eye on the foreign exchange rate market (forex) to make sure you can react to any changes. This doesnít just mean reacting to day-to-day changes, but also making longer-term predictions as to what you think the exchange rate is doing.

There are plenty of ways of keeping an eye on the exchange rate and make forecasts. Look at websites that trade in foreign currencies and see what forecasts they are predicting. Websites that offer foreign currency online rely on knowing what the exchange rate will be doing in the future, so are often have a wealth of useful information as to which currencies are strengthening and which are weakening. It is also worthwhile keeping an eye on the financial press, who will often make predictions as to what the exchange rate is expected to do in the future. If you do find the exchange rate is changing for the worse on a more permanent basis, rather than lower your prices and risk making a loss, try to broaden your horizons and look to territories where the exchange rate is more favourable so you can remain competitive.

Buying overseas

Ordering from suppliers overseas can be more difficult to master because you will be buying products based in the currency in which your supplier is based. For instance, if your supplier is in the eurozone, you will be converting sterling to euros to make your purchases, which could mean that if the euro strengthens in comparison to sterling, you will end up paying more for your goods. This means you have either to charge your customers more, making you less competitive, or find a way to minimise your losses, and there are a few ways to do this.

Firstly, if you do have to make international payments, then it is always best to avoid the banks, as their rates are usually quite bad in comparison to other foreign currency suppliers. Use a foreign exchange broker, but make sure they are regulated by the FSA (Financial Standards Authority). Secondly, and perhaps the best way to protect against exchange rate fluctuations is to ask your supplier if you can pay in your own currency. This not only means you donít have to do the conversions yourself, but also it makes things easier when it comes to making payments. Many overseas suppliers are open to such agreements, although they may expect a minimum order.

Finally, if your supplier is unwilling to let you pay in your own currency, they may be willing to embark in a forward contract with you. A forward contract is an agreement to buy from them at a set price, regardless of what the exchange rate is doing. It is worth noting, however, that while this protects you from losses if the exchange rate changes for the worse, it also means that if becomes more favourable, you will lose out on any benefit. Forward contracts are often set for about two years, so it offers you some long-term stability and you can make better long-term predictions as you will be paying the same amount for goods no matter what the exchange rate is doing.

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