Description
Businesses that trade internationally or have operations overseas are likely to be exposed to foreign exchange risk arising from volatility in the currency markets.
Identifying the Risk
Businesses that trade internationally or have operations
overseas are likely to be exposed to foreign exchange risk
arising from volatility in the currency markets.
The most common cause of foreign exchange exposure
arises from having to make overseas payments for your
imports priced in a foreign currency or receiving foreign
currency receipts for your exports. However, exposure
can also arise from:
• Foreign currency borrowing/deposits
• Overseas subsidiaries
• Assets located overseas
The impact that exchange rate ?uctuations have
on pro?tability will vary but in many cases it can be
signi?cant. FX risk is best explained with an example.
Example scenario
The following is a simpli?ed extract from a pro?t and loss
account of a UK exporter that regularly receives revenue
in US dollars. In this example, the UK exporter received
$2.4 million at a GBP/USD exchange rate of £1.00 = $1.60
which was converted into sales worth £1.5 million.
£1.00=$1.60 (£ 000s)
Sales revenues 1,500
Variable costs 1,200
Gross pro?t 300
Fixed costs 200
Net Pro?t 100
Consider the impact of, in this case, of a 10% adverse
movement in the exchange rate to £1.00 = $1.78. After
this FX move, the next receipt of $2.4 million will be
converted into sales of £1.35 million. This decline in sales
revenue puts the company into a loss-making situation.
£1.00=$1.60
(£ 000s)
£1.00=$1.76
(£ 000s)
£1.00=$1.76
(£ 000s)
Response
Sales revenues 1,500 1,350 2,700
Variable costs 1,200 1,200 2,400
Gross pro?t 300 150 300
Fixed costs 200 200 200
Net Pro?t 100 -50 100
The response column in the table above (3rd column)
shows that following a 10% adverse exchange rate
movement, this company will need to double its sales
turnover to restore pro?tability to previous levels!
Effective management of this FX risk is therefore crucial
but does not need to be unnecessarily complicated. At
HSBC, we advocate the use of a simple four-point plan to
help you adopt a structured approach.
The Four Point Plan
Point 1 – Understand your exposures
There is a raft of factors to take into account when
assessing your exposure to foreign exchange rate risk,
for example:
• What proportion of your business relates to imports
or exports?
• What currencies are involved?
• What are the timings of payments?
• What impact would an adverse rate movement have
on your pro?tability?
• Is the level of overseas business likely to change?
• Do you pay and receive in the same foreign currency
– it may be possible to mitigate the exchange risk by
using a foreign currency bank account?
Point 2 – Understand the products
There are only three basic alternative methods to manage
foreign exchange risk.
• Do nothing and buy or sell your currency in the spot
market. You act on the day you want to buy or sell
your foreign currency. We will quote you an exchange
rate and the transaction will settle two working days
later. While simple, this approach means you will
not know how much sterling you will need to pay
or receive for your foreign currency until the day in
question.
This can be a high-risk strategy as the exchange rate
may have moved signi?cantly since you agreed the
price with your customer/supplier. If rates have moved
the wrong way, your pro?t will be reduced accordingly.
FOREIGN EXCHANGE RISK MANAGEMENT
Please note: HSBC provides foreign exchange risk management products to customers on a strictly
non-advised basis.
Identifying and Managing
Foreign Exchange Risk
• Lock in to ?xed rates – as soon as you become aware
of a need to exchange foreign exchange at a future
date, you can ?x the exchange rate by booking a
forward exchange contract. This approach provides
certainty but you could suffer an opportunity loss if
rates subsequently move in your favour and you are
obliged to transact at the forward contract rate
• Use ?exible products – a currency option will offer you
the potential for upside bene?t if rates move in your
favour – like a spot deal, but will provide protection
against adverse rate movements – like a forward
contract. For this ?exibility, we will normally charge
a premium although there are a range of alternative
structured option products available where an up front
premium is not required
Point 3 – Develop a strategy
It may not always be best to adopt any one of the three
alternatives in isolation to manage your foreign exchange
risk. Many businesses, re?ecting their attitude to risk,
their view of the currency markets, preparedness to
pay premiums and a host of other factors, will adopt a
portfolio approach – using a combination of spot, forward
exchange contracts and currency options, HSBC will
work with you to develop a strategy that best meets
the requirements of your business. For example, in an
uncertain exchange rate environment, you may decide
to transact 25 per cent of your currency in spot, ?x 25
per cent with a forward contract and cover 50 per cent
with ?exible products such as an option. This way, if
rates move in your favour, you will bene?t on 75 per cent
of your exposure (spot and options) while if rates move
against you, you are protected on 75 per cent (forward
contracts and options). This is a balanced approach that
provides ?exibility, and avoids you paying a premium for
all of your protection.
Point 4 – Implement it
It is often tempting to defer a decision to implement your
foreign exchange risk management strategy, perhaps in
the hope that rates may move in your favour in the short
term. Historically, currency markets have been extremely
volatile and unpredictable – it makes sense, therefore,
once you have formulated a strategy, to implement it
without delay and ensure your pro?ts are protected.
Summary
For many businesses, the impact of exchange rate
volatility can be signi?cant. HSBC has a team of
specialists available to help you develop an appropriate
strategy for your business – please contact your HSBC
relationship manager for further details.
Contact point
For further information, please refer to your local Global
Markets contact.
Important: Please read carefully
This document is issued by HSBC Bank plc (“HSBC”). HSBC is authorised by the Prudential Regulation Authority (“PRA”) and regulated
by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority and is a member of the HSBC Group of companies
(“HSBC Group”). Any member of the HSBC Group, together with their directors, of?cers and employees may have traded for their
own account as principal, underwritten an issue within the last 36 months, or have a long or short position in any related instrument
mentioned in this material.
Spot and forward foreign exchange transactions generally are not ‘designated investments’ as de?ned in the United Kingdom Financial
Services and Markets Act 2000 (the “Act”) and therefore do not bene?t from the protections of the Act or the rules of the FCA. Any other
product described in this document is a ‘designated investment’ as de?ned in the Act, even when used to cover a commercial trade position.
Hedging instruments, such as caps or options, even when used to cover a commercial position, are investments under the Act.
This document is for information and convenient reference, and is not intended as an offer or solicitation of the purchase or sale of
any derivative product. HSBC is under no obligation to keep current the information in this document. This document is not intended
to provide and should not be relied upon for tax, legal or accounting advice. Prospective investors should consult their tax, legal,
accounting or other advisors.
Figures included in this document may relate to past performance or simulated past performance. Past performance is not a reliable
indicator of future performance. The instruments appearing in this document are not readily realisable investments; it may also be dif?cult
to obtain reliable information about their value or the extent to which they are exposed. Investments can ?uctuate in price or value and prices,
values or income may fall against an investor’s interests. Changes in rates of exchange and rates of interest may have an adverse effect on
the value, price or income of these investments. The levels and bases of taxation can change. Derivatives can be utilised for the management
of investment risk, however, derivative instruments may not be suitable for all investors, as they may be contingent liability transactions
such as swaps. This means that the investor may not only lose all the amount invested, but may also have to pay an additional sum at a later
date. Prospective investors should ensure that they read the applicable standard risk warning in conjunction with this document, and where
necessary seek advice.
This presentation is a “?nancial promotion” within the scope of the rules of the FCA.
HSBC Bank plc
Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority
Registered in England No. 14259
Registered Of?ce: 8 Canada Square, London, E14 5HQ, United Kingdom
Member HSBC Group
DISCRPFS0413
Designed and produced by HSBC Global Publishing Services. 131227_80528
doc_955104160.pdf
Businesses that trade internationally or have operations overseas are likely to be exposed to foreign exchange risk arising from volatility in the currency markets.
Identifying the Risk
Businesses that trade internationally or have operations
overseas are likely to be exposed to foreign exchange risk
arising from volatility in the currency markets.
The most common cause of foreign exchange exposure
arises from having to make overseas payments for your
imports priced in a foreign currency or receiving foreign
currency receipts for your exports. However, exposure
can also arise from:
• Foreign currency borrowing/deposits
• Overseas subsidiaries
• Assets located overseas
The impact that exchange rate ?uctuations have
on pro?tability will vary but in many cases it can be
signi?cant. FX risk is best explained with an example.
Example scenario
The following is a simpli?ed extract from a pro?t and loss
account of a UK exporter that regularly receives revenue
in US dollars. In this example, the UK exporter received
$2.4 million at a GBP/USD exchange rate of £1.00 = $1.60
which was converted into sales worth £1.5 million.
£1.00=$1.60 (£ 000s)
Sales revenues 1,500
Variable costs 1,200
Gross pro?t 300
Fixed costs 200
Net Pro?t 100
Consider the impact of, in this case, of a 10% adverse
movement in the exchange rate to £1.00 = $1.78. After
this FX move, the next receipt of $2.4 million will be
converted into sales of £1.35 million. This decline in sales
revenue puts the company into a loss-making situation.
£1.00=$1.60
(£ 000s)
£1.00=$1.76
(£ 000s)
£1.00=$1.76
(£ 000s)
Response
Sales revenues 1,500 1,350 2,700
Variable costs 1,200 1,200 2,400
Gross pro?t 300 150 300
Fixed costs 200 200 200
Net Pro?t 100 -50 100
The response column in the table above (3rd column)
shows that following a 10% adverse exchange rate
movement, this company will need to double its sales
turnover to restore pro?tability to previous levels!
Effective management of this FX risk is therefore crucial
but does not need to be unnecessarily complicated. At
HSBC, we advocate the use of a simple four-point plan to
help you adopt a structured approach.
The Four Point Plan
Point 1 – Understand your exposures
There is a raft of factors to take into account when
assessing your exposure to foreign exchange rate risk,
for example:
• What proportion of your business relates to imports
or exports?
• What currencies are involved?
• What are the timings of payments?
• What impact would an adverse rate movement have
on your pro?tability?
• Is the level of overseas business likely to change?
• Do you pay and receive in the same foreign currency
– it may be possible to mitigate the exchange risk by
using a foreign currency bank account?
Point 2 – Understand the products
There are only three basic alternative methods to manage
foreign exchange risk.
• Do nothing and buy or sell your currency in the spot
market. You act on the day you want to buy or sell
your foreign currency. We will quote you an exchange
rate and the transaction will settle two working days
later. While simple, this approach means you will
not know how much sterling you will need to pay
or receive for your foreign currency until the day in
question.
This can be a high-risk strategy as the exchange rate
may have moved signi?cantly since you agreed the
price with your customer/supplier. If rates have moved
the wrong way, your pro?t will be reduced accordingly.
FOREIGN EXCHANGE RISK MANAGEMENT
Please note: HSBC provides foreign exchange risk management products to customers on a strictly
non-advised basis.
Identifying and Managing
Foreign Exchange Risk
• Lock in to ?xed rates – as soon as you become aware
of a need to exchange foreign exchange at a future
date, you can ?x the exchange rate by booking a
forward exchange contract. This approach provides
certainty but you could suffer an opportunity loss if
rates subsequently move in your favour and you are
obliged to transact at the forward contract rate
• Use ?exible products – a currency option will offer you
the potential for upside bene?t if rates move in your
favour – like a spot deal, but will provide protection
against adverse rate movements – like a forward
contract. For this ?exibility, we will normally charge
a premium although there are a range of alternative
structured option products available where an up front
premium is not required
Point 3 – Develop a strategy
It may not always be best to adopt any one of the three
alternatives in isolation to manage your foreign exchange
risk. Many businesses, re?ecting their attitude to risk,
their view of the currency markets, preparedness to
pay premiums and a host of other factors, will adopt a
portfolio approach – using a combination of spot, forward
exchange contracts and currency options, HSBC will
work with you to develop a strategy that best meets
the requirements of your business. For example, in an
uncertain exchange rate environment, you may decide
to transact 25 per cent of your currency in spot, ?x 25
per cent with a forward contract and cover 50 per cent
with ?exible products such as an option. This way, if
rates move in your favour, you will bene?t on 75 per cent
of your exposure (spot and options) while if rates move
against you, you are protected on 75 per cent (forward
contracts and options). This is a balanced approach that
provides ?exibility, and avoids you paying a premium for
all of your protection.
Point 4 – Implement it
It is often tempting to defer a decision to implement your
foreign exchange risk management strategy, perhaps in
the hope that rates may move in your favour in the short
term. Historically, currency markets have been extremely
volatile and unpredictable – it makes sense, therefore,
once you have formulated a strategy, to implement it
without delay and ensure your pro?ts are protected.
Summary
For many businesses, the impact of exchange rate
volatility can be signi?cant. HSBC has a team of
specialists available to help you develop an appropriate
strategy for your business – please contact your HSBC
relationship manager for further details.
Contact point
For further information, please refer to your local Global
Markets contact.
Important: Please read carefully
This document is issued by HSBC Bank plc (“HSBC”). HSBC is authorised by the Prudential Regulation Authority (“PRA”) and regulated
by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority and is a member of the HSBC Group of companies
(“HSBC Group”). Any member of the HSBC Group, together with their directors, of?cers and employees may have traded for their
own account as principal, underwritten an issue within the last 36 months, or have a long or short position in any related instrument
mentioned in this material.
Spot and forward foreign exchange transactions generally are not ‘designated investments’ as de?ned in the United Kingdom Financial
Services and Markets Act 2000 (the “Act”) and therefore do not bene?t from the protections of the Act or the rules of the FCA. Any other
product described in this document is a ‘designated investment’ as de?ned in the Act, even when used to cover a commercial trade position.
Hedging instruments, such as caps or options, even when used to cover a commercial position, are investments under the Act.
This document is for information and convenient reference, and is not intended as an offer or solicitation of the purchase or sale of
any derivative product. HSBC is under no obligation to keep current the information in this document. This document is not intended
to provide and should not be relied upon for tax, legal or accounting advice. Prospective investors should consult their tax, legal,
accounting or other advisors.
Figures included in this document may relate to past performance or simulated past performance. Past performance is not a reliable
indicator of future performance. The instruments appearing in this document are not readily realisable investments; it may also be dif?cult
to obtain reliable information about their value or the extent to which they are exposed. Investments can ?uctuate in price or value and prices,
values or income may fall against an investor’s interests. Changes in rates of exchange and rates of interest may have an adverse effect on
the value, price or income of these investments. The levels and bases of taxation can change. Derivatives can be utilised for the management
of investment risk, however, derivative instruments may not be suitable for all investors, as they may be contingent liability transactions
such as swaps. This means that the investor may not only lose all the amount invested, but may also have to pay an additional sum at a later
date. Prospective investors should ensure that they read the applicable standard risk warning in conjunction with this document, and where
necessary seek advice.
This presentation is a “?nancial promotion” within the scope of the rules of the FCA.
HSBC Bank plc
Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority
Registered in England No. 14259
Registered Of?ce: 8 Canada Square, London, E14 5HQ, United Kingdom
Member HSBC Group
DISCRPFS0413
Designed and produced by HSBC Global Publishing Services. 131227_80528
doc_955104160.pdf