Could an FX Open Forward help you to navigate volatility?

In the current climate, individuals with income or assets in multiple currencies have been exposed to high levels of volatility, including a fall in the value of sterling. Here, Head of Private Client Foreign Exchange Dealing Charles Lesia is joined by Foreign Exchange Dealer David Bimpson and Treasury Sales Specialist Jessica Marr, to explore how individuals and businesses might benefit from securing the exchange rates they use in the future, with an FX Open Forward.

“From a private client perspective, we work with individuals from a broad range of professional backgrounds,” says Charles. “When it comes to foreign exchange, these can include, but are not limited to, private equity professionals, business entrepreneurs, property entrepreneurs and city professionals. Many of these clients typically have non-traditional income streams including US Dollars or Euros. This means they may wish to mitigate the risk of market movements to maintain a regular cash-flow and prepare for key life events such as buying a property.”

“On the corporate side we work with businesses with a significant foreign currency exposure.” Jessica adds. “We’re sector agnostic and work with a lot of different-sized businesses across the market. Whether listed, private equity-backed, or privately owned companies, our team understands the nuances of working with entrepreneurs and owner-managed businesses.”

“The main challenge is timing. While some of our clients receive income in a foreign currency, many entrepreneurial minded clients are involved in various deals across different markets, and the timing of when you enter or exit those deals is critical. This is something we have seen recently with the fall in the value of sterling,” says Charles. “Most of our clients understand that some of their transactions create FX exposure, but are unsure of the right tools to use to manage that risk. Therefore, being flexible and providing a high level of support is vital.”

“We encourage clients to think about FX for their personal finances the same way as they would within a business,” says David. “This means considering budget rates, cash flow requirements, how to manage risk and minimise exposure, while working with a partner that can apply the tools available to businesses to manage their transactions.

“In a business environment, a finance director typically considers liquidity events, cash-flow planning and a budget for exchange rates as part of its long-term financial planning. In contrast, when it comes to personal finance, individuals are often time-poor and may focus on how to take advantage of the market highs and lows. However, it is important for them to think about current and future market conditions,” he adds. “At the moment, the fall in the value of sterling means clients with cash in US dollars and Euros are locking in exchange rates for transactions due on a future date using tools like FX Open Forwards.”

“An FX Open Forward is very similar to a Fixed Forward. The agreement enables a currency transaction to be booked in advance with a confirmed exchange rate. This allows our clients to hedge FX risks and exposures generated by their eligible commercial or personal transactions to help guarantee future cash-flow,” says Charles. You cannot book an FX Open Forward or a FX Fixed Forward for speculative or investment purposes.

“With an Open Forward, clients now have the flexibility to trade currency pairs for any future settlement date within two years, with the enhanced flexibility of early settlement if required. This ‘window period’ is essentially a time when a client may expect an event to occur. For example, if a client is purchasing a house and they know the completion date could vary depending on multiple factors, they may be able to secure a window period to settle a trade. Other use cases could be when disposing of a business asset, or even receiving bonuses or a salary in foreign currencies.”

“As we know in the corporate world, nothing is guaranteed, so having a longer period of time in which to settle a trade is also useful,” notes Jessica. “It means that if there are any unforeseen issues with suppliers or customers, you may have more control over your cash flow.

“Open Forwards can also be used for larger transaction-driven events, such as merger and acquisition activity,” she adds. “Quite often these transactions might need to be moved a few weeks out due to a number of variables, so having that increased window is vital.”

“Clients should be aware that, if for any reason the underlying event doesn’t occur, then we would unwind the FX Open Forward  contract,” says David. “While there would likely be a market dependent cost involved in doing this, your FX Dealer will be able to help you navigate this process should you ever need to.”

There are also other ways to manage your currency exposure too. “We encourage clients to speak to us about their financial goals to explore their choices,” says Charles. “We build personal relationships with our clients and we work closely with our private and corporate banking colleagues and the team at Investec Wealth & Investment to provide a joined-up solution.”

Important information

Any opinions, forecasts or estimates do not necessarily reflect the view of Investec Bank plc ("Investec"), its subsidiaries or affiliates. This commentary does not have regard to the specific investment objectives, financial circumstances or particular needs of any recipient and it should not be regarded as a substitute for the exercise of investors' own judgement. Investors should seek their own financial, tax, legal and regulatory advice regarding the appropriateness or otherwise of investing in any investment strategies and should understand that past performance is not a guide to future performance and the value of any investments may fall as well as rise. This commentary is confidential and may not be disclosed or distributed to any third party without the prior written consent of Investec.

You can only book a FX Forward which is for an underlying personal or commercial spending purpose. You cannot book a FX forward for investment or speculative purposes, for example in order to achieve a gain based on movements in exchange rates. Also, you cannot book a FX Forward on behalf of any other person. Additional terms and eligibility criteria apply for FX Forwards.