Some things you need to know about foreign exchange:

  • In 2008 the Australian dollar experienced a 44% volatility range.   
  • If you have foreign payables/receivables of $US500,000 per year, a 2.86% move by the Australian dollar can cost you more than $A19,000
  • If you have foreign payables/receivables of $US10,000,000 per year, a 2.86% move by the Australian dollar can cost you more than $A396,000

Being prepared and having a simple foreign exchange policy can minimise this currency risk. Managing your business in the current global environment can have financial impacts that can be avoided or at the very least minimised.

Risk Management Tools
You can use Risk Management Tools to manage foreign exchange risk.

Below are some of the tools you can use:

Limit orders: A limit order lets customers instruct us to buy or sell one currency for another currency at a target rate that is better than the current market rate. Customers leave such orders with us to take advantage of exchange rate movements that occur when they may not be able to monitor rates themselves or during overnight markets when they are asleep.

OzForex provides its customers with the opportunity to leave limit orders on the overnight markets. As foreign exchange markets are open 24 hours and volatility often occurs during overnight sessions, you may miss out on the best rates if you are unable to monitor movements all the time.

Forward contracts: Forward contracts allow you to lock in an exchange rate immediately without having to pay for the purchased currency until a future date. The forward exchange rate is calculated by using the current exchange rate and interest rates for the two currencies and the time or length of the contract. The forward exchange rate is a function of the current exchange rate and interest rates of the two currencies involved and is not a forecast of the future direction of the exchange rate.

Forward contracts usually require a deposit. This allows you to utilise the majority of your funds until the end of the forward contract when the funds are exchanged. Forward contracts also reduce your exchange rate risk by locking in a rate now even though the actual transaction won’t take place until a later date. In this way, you can be sure of the cost of your purchased currency before you actually need it.

These tips were provided by GHA business partner, Ozforex. All members of GHA get access to special deals on Ozforex services and tools.