Locking Exchange Rates: Turning Exchange Rate Swings to your Advantage
INTRO: Fluctuations in foreign currency rates could cause you to lose money. Maintaining a dynamic response to currency fluctuations requires you to be alert. When you set up an agreement to lock rate, you achieve stability and eliminate risks, meaning you will no longer be affected by exchange rate changes, dramatic interest rates decisions or any other crisis in the markets.
Rate lock or a forward exchange contract are used to enable individual or businesses to lock in and exchange rate for a predetermined date in the future, hedging against exchange rate fluctuations.
When costs rise due to volatile currency fluctuations, renegotiating terms and prices are not always an option, and behind the scenes, your local bank isn’t making things easier – charging high transfer fees, converting FX at unfair rates, and delaying payments. Losses as a result of foreign trade transactions can easily cause a business to move from profit to a loss, and in most cases, they will surprise you when you least expect them. Rate lock-ins can provide you with some peace of mind.
If you are conducting business on a global scale, you most likely need an effective solution to hedge against currency risks and locking exchange rates may just be your best bet. You can minimize any future cash flow uncertainty, by locking exchange rate when it seems most advantageous. This keeps losses and rates on foreign exchange low.A perfect solution for locking exchange rates is the ABCM™. Platform. Learn more about this Automated Business Currency Management platform and how it can help you hedge currency risk in this article.
Why It’s Important to Lock Rates?
Exchange rate optimization is hit-or-miss, especially in volatile currency markets. Managing payments in a business is hard enough without having to worry about adverse exchange rates, especially when we are talking about payments in multiple currencies. There are too many accounts to maintain, international transfers to keep track of, and far too much money spent on adverse exchange rates and unfair banking fees.
That favorable exchange rate that you set with a raw materials supplier in January that has you stuck for the year in June. The sudden rise of the dollar or Euro against your local currency on the brands you import. The hefty payment issued to a team of software developers overseas for a special project which could have saved you thousands had you paid a month earlier.
Your frustration mounts as you fail to meet planned budget targets, because you were blindsided by exchange rate movements and were clueless as to how to handle your hedging transactions. Are you going to absorb the loss or downstream it to the consumer who may not be willing to pay more? Face it: Losses incurred on transactions involving more than one currency are a silent business killer, and they always seem to take you by surprise when you least expect them.
From deciding on a fixed exchange rate with suppliers over a given time period, to determining competitive consumer prices on imported goods and designing your multi-currency international payroll policy for the coming year – one wrong move can lead to a heap of trouble. Staying on top of the volatile, elusive, and unpredictable world of currency is, after all, your only hope of taking charge of the delicate tradeoffs in your foreign exchange operations.
Benefit from Currency Fluctuations
With ABCM™, it’s easy to turn exchange rate swings to your advantage.
High exchange rates can have huge financial implications on your business, and the risks increase when your local currency becomes devalued. Here's a practical illustration:
Let’s assume you want to buy something from a supplier in China, but you don’t really have to pay for it until several weeks (or months) later. You agree to pay the person the 100$ worth of supply in their local currency yuan. However, by the time your payment is due, you simply cannot guarantee that the 100$ will have the same worth against the Chinese yuan. To avoid paying more, you create a forward contract to lock-in your exchange rate, reserving current prices and protecting yourself against any market volatility.
With ABCM™ you’ll be able make the most out of your payments, and never miss out on any favorable currency rates. You can minimize any future cashflow uncertainty by locking the exchange rate when it seems most advantageous and keep current on what’s happening in global financial markets with AI-driven insights so that you can make real-time informed and confident decisions.
Mitigate Risks and Optimize Workflows
Exchange rates are dynamic and unpredictable. Most businesses don’t have access to expensive, top-tier market information systems that can help them determine the fair forward rates. Bank trade rooms often take advantage of this weakness by offering uncompetitive FX rate quotes and fuzzy collateral requirements. With ABCM™, you don’t need access to pricey information systems. Automated Business Currency Management provides a fast and clear execution route to forward transactions at competitive market rates.
The platform empowers you with the transactional capabilities of a large conglomerate, and provides a clear, birds-eye view of the multiple currencies you juggle across your enterprise’s global activities at any given moment. Locking exchange rates is a key tool that allows you to sidestep the many challenges standing in the way of your business, making it difficult to prepare for and follow-up on multiple currency transactions.