How to protect your business against foreign exchange volatility

Nothing can send shockwaves rippling through a business that imports or exports goods or services like sudden currency movements, writes Gregory Garner Head: Foreign Exchange, Access Bank Plc.

Within minutes, a profitable deal can turn a loss, through no action of your own. It is impossible to do projections or do budgets when you are relying on a stable currency, and get the opposite.

The ZAR is one of the most volatile currencies in the world now. As we saw in 2021, it moved between a low of 13:41/USD to high of 16:36/USD; 16:31/EUR to 19:01/EUR; and 18:95/GBP to 21:76/GBP; which is a 22%, 17% and 10% move respectively.

Economists predict that 2022 will be no different, so currency-dependent businesses need to do what they can to protect themselves.

Access to foreign exchange solutions

Access Bank Plc works with businesses of all sizes across many industries and offers its foreign exchange clients a variety of products and solutions to buy and sell foreign exchange.

One of the most common questions we are asked at Access Bank is, “How to we protect our business against currency volatility?” One product we suggest is a forward exchange contract, more commonly referred to in the financial services industry as an FEC.

An FEC provides a business with a sense of stability in the fact that a specific exchange rate has been locked in now for a payment due in the future. This ensures invaluable peace of mind, as it essentially protects the underlying profit in the goods being sold or bought, regardless of what happens to the exchange rate in the future.

So how does it work? Firstly, you must ensure you have the FEC facility set up on your banking profile. If you don’t, contact a Relationship Manager who will take the necessary steps to provide one.

Once you have an FEC facility, you contact a foreign exchange Direct Dealing Room at Access Bank and specify the currency or currencies you would like to exchange. You select a date on which to send this transfer, and the amount that would be expected to be transferred.

Two days before the maturity date of the FEC – the day that you wish to transfer the money – an Access Bank representative will contact you to confirm payment instructions and request the necessary supporting documentation to ensure smooth transfer of funds.

Your FEC in action…

Here is an example: a South African company wishing to purchase stock in USD, who enters into the FEC for 90 days (three months). The spot rate is R15.50/$, the US interest rate is 0.25% and the South Africa’s interest rate in 3,75%.

The difference in interest rate is therefore 3,75% – 0,25% = 3,5%. Using the 365-day convention, one would multiply the difference in interest rates by 90 days: 3,5% x (90/365) = R0.19* (rounded for simplicity), then add the forward points to the spot rate to determine the forward rate: R15,50 + R0,19 = R15,69.

This would be the rate fixed for the 90 day future date, regardless of any market volatility.

If you are interested in learning more about foreign exchange, FECs or any other products Access Bank Plc offers, please contact us. Our foreign exchange relationship managers will guide you through the process, step by step, ensuring your peace of mind for this and future financial processes.

Written by: Gregory Garner Head: Foreign Exchange