Many banks completely avoid foreign exchange risk. They borrow and lend in the same currency. Any customer trades are immediately offset. Bigger players use spot, forward and options markets. But an underlying theme of monitoring and managing exposures overrides. For small businesses things can be different. FX mismatches don’t always get priority. With the recent weakness in Sterling if you export and have unhedged currency earnings; happy days, not so for importers paying in FX. Many SMEs will take this on the chin – the decline in Sterling being just one of those risks you can’t do much about. If that’s your view and you run some currency exposure it’s time to reconsider:
What’s the size of that risk relative to your profitability?
What would an adverse change in the FX rate mean for you?
Can you pass the costs on to customers?
Can you change your terms of trade?
How do you price your goods and services?
When you buy and sell FX could you get better rates elsewhere?
Could you benefit from simple hedging?
Why now? The Bank of England’s mandate is not the exchange rate. Decisions are targeting other economic variables. Unconventional monetary policy is experimental and the outcome is unknown. As a result the value of GBP will almost inevitably take some of the strain. This could be either up or down. Volatility aka risk has increased.
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