*This content is brought to you by Sable International. With offices in Cape Town, London and Melbourne they have fast become experts in assisting South Africans with all their international money transfer needs.
By Andrew Rissik*
In an unpredictable political climate where currency volatility can rear its head at any moment, it’s vital to have a game plan to protect yourself. There are numerous, relatively simple, strategies and tools you can use to identify and protect yourself or your South African business from downside risk while still being able to take advantage of upside movements.
Two of the most useful tools when mitigating your currency risk are forward contracts and market orders. These are available to both private and corporate individuals and each can help you navigate the choppy waters of volatile forex markets.
Forward contracts: Better safe than sorry
The most effective way to lock in your cash is to secure a forward contract. A forward contract secures an exchange rate for an agreed upon time in the future. This contract could cover just one or multiple payments on different dates. Most brokers worth their salt will be able to offer these to their clients, some won’t even charge an additional fee to make use of this facility.
By booking ahead, you are obliged to buy or sell the currency on a specified date at an agreed price. You can fix an exchange rate for up to one year in advance, therefore removing the unknown from your currency trades.
Read also: Navigating through Zumanomics: Rand strength, downgrades and going offshore
While a forward contract could limit potential upside gain, it allows businesses to lock in their profits and individuals to mitigate risks associated with foreign currency payments. As always when it comes to the unknown, you’ll have to make the call as to what your risk/reward appetite is.
Market orders
Limit orders: Setting a target
If your currency exposure is shorter, you might want to look at using a limit order rather than getting stuck into some medium-term forward contracts.
A limit order provides an upside price target. This means that you set your desired currency price target above where the market is currently trading and when the market hits your price, your order is automatically filled.
This is an excellent way of ensuring you receive the exchange rate you’re after. Of course, you run the risk of your currency never reaching your upside target. This is why it’s important to consult with your broker about the viability of the limit order you intend to set up. Magical thinking has no place when it comes to securing the optimal exchange rate.
Stop-loss orders: Protect yourself
A stop-loss order stops loss – simple as that. It allows you to set a “worst case” price to trade at below the current market level. Your order will be filled if the market drops to, or beyond, your protective price.
Get the best of both
Limit and stop-loss orders are known as market orders. These orders can be run in combination with one another, in what is known as an OCO (“One Cancels the Other”) order. The moment your upper or lower price target is hit, your order will be filled and the other price target is immediately cancelled.
Setting your upper and lower limits means that your risk is hedged and you are able to receive your optimum price target if at all possible. Knowing that you will achieve the best currency outcome provides unprecedented peace of mind.
How do I manage my currency risk?
Using these strategies could potentially save you a lot of money down the line. You should partner with a brokerage that has the expertise to identify, evaluate and mitigate the currency risks you face based on your particular situation. Whether you’re experienced in all things finance or you’re just starting out, having an experienced forex specialist in your corner is a must if you intend on investing or trading internationally.
Don’t underestimate the value of seeking foreign exchange advice. Find yourself a broker you can trust, get talking with them and see if there are ways you can reduce the risks your international payments are subject to.
- Andrew Rissik is the Director of Forex and International Projects at Sable International. If you’d like to email his team about moving currency offshore just email [email protected].
