Case study: Manufacturing

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It’s part and parcel of manufacturing that you have partners and suppliers overseas and that leaves huge scope to be severely impacted by market movements. Trying to react to these changes and adapt in real time to currency fluctuations is a risky move as you’re always playing catch up. Here’s just one example of how we worked with a manufacturing client to help them mitigate these risks.

The client

A UK based manufacturing company that regularly imports supplies from Europe.

The challenge

Each month, the cost of their invoices would vary depending on the value of supplies being ordered. Therefore, the client wanted the most favourable exchange rate possible but also wanted to be protected from any drops in GBP/EUR that could cause significant losses.

The solution

Our team created a FX currency strategy that incorporated three types of foreign exchange contract.

The first was a forward contract. This allows you to secure a rate for up to two years and take advantage of a great rate even if you don’t need to make the international transfer straight away. The second was a limit order. This contract lets you target a favourable future exchange rate. We’ll monitor the market and purchase the currency on your behalf once the rate is reached. Finally, we proposed a stop loss. This means you set a worst case scenario exchange rate and if your currency reaches that, we’ll make an exchange to protect you from any further losses.

This strategy was built around a ‘30/40/30’ approach. I.e. 30% of the invoiced amount was placed on a forward contract, 40% on a stop loss and the remaining 30% was placed on the open market using a limit order, leaving the currency open to be purchased if the rate improved.

This means you benefit if the pound gains against the euro as only 30% of your payment was booked on a set rate. And because the rate has gone in your favour, the stop loss won’t be triggered, and you have 70% of your funds to send at the improved exchange rate.

This is what happened to the client.

However, if market moves hadn’t gone their way, they would also have been protected. The forward contract and stop loss would have covered 70% of the transfer, meaning only 30% would need to be purchased using a spot contract (buying currency using the exchange rate on the day).