Search Blog
Blogroll
  • Alan Fustey
  • Becky Wong
  • Bert Griffin
  • Blair MacDougall
  • Blake Goldring
  • Brett Baughman
  • Camillo Lento
  • Chris Delaney
  • Cynthia Kett
  • Darren Long
  • Desmond Jordan
  • Don Shaughnessy
  • Doug Lamb
  • Ed Olkovich
  • Eva Sachs
  • Evelyn Jacks
  • Gail Bebee
  • Gerald Trites
  • Gordon Brock
  • Guy Conger
  • Guy Ward
  • Heather Phillips
  • Ian Burns
  • Ian R. Whiting
  • Ian Telfer
  • Jack Comeau
  • James Dean
  • James West
  • Jeffrey Lipton Fairmont Gloucester
  • Jim Ruta
  • Jim Yih
  • Joe White
  • Jonathan Chevreau
  • Kenneth Eng
  • Larry Weltman
  • Malvin Spooner
  • Mark Borkowski
  • Marty Gunderson
  • Michael Kavanagh
  • Monty Loree
  • Nick Papapanos
  • Norma Walton
  • Pat Bolland
  • Patrick O’Meara
  • Paul Brent
  • Peter Deeb
  • Peter Lantos
  • Riaz Mamdani
  • Richard Crenian
  • Richard Warke
  • Rick Atkinson
  • Rob Peers
  • Robert Bird
  • Robert Gignac
  • Sam Albanese
  • Stephane Ruah
  • Steve Nyvik
  • Steve Selengut
  • Tammy Johnston
  • Terry Cutler
  • Trade With Kavan
  • Trevor Parry
  • Trindent Consulting
  • Wayne Wile
  • Categories
    August 2012
    M T W T F S S
    « Jul   Sep »
     12345
    6789101112
    13141516171819
    20212223242526
    2728293031  

    Tags

    Taking the Foreign out of Foreign Exchange.

    Mark Borkowski

    Canadian importers and exporters are suffering. While the economic recovery appears underway, currency volatility continues to impact the bottom line of businesses.

    I spoke with Rahim Madhavji, president of Knightsbridge Foreign Exchange. He believes that the time for accepting rampant currency volatility is over. There are tools businesses can use to minimize this risk. Businesses can plan ahead without having to worry about how the US dollar or how the Euro will impact their profit margins.

    Banks have been providing these risk management tools, but generally only to larger clients. The remaining Canadian businesses are left to figure it out themselves. While banks continue to proactively service large institutions, corporate foreign exchange companies like Madhavji’s focus specifically on small and medium sized businesses and private clients (foreign property purchasers), offering better than bank FX rates as well as proactive hedging services allowing one to lock-in a rate today for a certain time in the future.

    Madhavji explains: “If your business has foreign exchange exposures, currency movements will impact your bottom line. Many businesses are invoiced today in US dollars but are not required to pay for products until they are delivered months later. In that time, the exchange rate could have dramatically taken a turn for the worse, exposing the company to losses. The impact on cash flows impacts the ability to repay bank debt as well as pay shareholders. Businesses should consider hedging their predictable currency requirements to protect cash flows. Madhavji said FX companies help businesses take the “foreign out of foreign exchange.”

    The big five banks have a stronghold on the corporate foreign exchange market. Market share is estimated at over 95%. However, high currency margins of up to 2.5% are hidden within the FX rate. This has created the entry of independent providers which provide more competitive pricing and proactive service.

    Businesses should consider validating the FX pricing they receive with another provider to determine if there are opportunities for significant savings.

    In addition to better pricing, there are a couple of things a business can do to protect itself from foreign exchange volatility.

    Business can book a forward contract. A forward contract allows a company to lock-in an exchange rate today for use at a predetermined date in the future. A machinery importer can lock in an exchange rate of 1.0300 USD/CAD today for six months and can therefore fix its US inventory cost and know the price it should sell its products in Canada. If the exchange rate moves unfavorably – the business is not impacted. A forward contract removes the element of risk associated with future foreign currency requirements and allows one to plan ahead.

    However, some businesses may want to take on some currency risk. Madhavji suggest a solution called a “bid order”.

    This allows a business to instruct their FX provider to execute a transaction only if the foreign exchange rate can be executed at the rate specified by the client. “If the current rate is 1.0300 and the client requests 1.0200, the FX firm can watch the markets in real-time, until the rate meets the appropriate threshold. Even if the exchange rates meet the threshold for a few seconds, the transaction can be executed in that time. Madhavji said that this can often save a CFO significant time from having to watch the markets on a constant basis.

    Each company has unique foreign exchange exposures to consider and varying internal resources to manage them. Using a foreign exchange company is an effective method to outsource the treasury function, save time, and improve ones bottom line.

    By: Mark Borkowski, president of Mercantile Mergers & Acquisitions Corporation

    www.mercantilemergersacquisitions.com

    Rahim Madhavji is president of Knightsbridge Foreign Exchangewww.knightsbridgefx.com

    The MONEY® Network