Financial journalist Farah Khalique explains how small businesses can deal with volatile exchange rates.

By Farah Khalique

An exciting milestone for new and growing companies (NGCs) is to establish international operations, but it can be all too easy to forget one particular risk that can wipe out profits - currency risk. 
 
Every day, currencies rise and fall in value against one another with approximately $5.3 trillion traded every single day. But this year, FX markets have experienced unprecedented volatility as the US dollar rapidly strengthens in line with its improving economy, while the euro simultaneously weakens amid disappointing economic data and fears that Greece could go bankrupt.
 
A stronger dollar means that a UK company's translated income from its US business operations would leave it with fewer pounds in its pocket than even just a month ago. British exporters are also vulnerable to volatile exchange rates. The pound is appreciating daily against the embattled euro, which makes it more expensive for businesses in the eurozone to import from the UK.
 




The solution?

 
The answer lies in hedging. NGCs can manage currency risk using a straightforward contract known as a currency forward, which allows them to buy or sell a foreign currency at today's prices, meaning they lock in a fixed rate for months down the line.
 

SMEs typically buy hedging products through a traditional bank or a broker, says Pryor, but this bank-dominated market is ripe for disruption.

Currency options are another hedging solution available to companies that can even turn a tidy profit if exchange rates move in their favour, but they are more risky and come with a costly premium.
 
Smart companies are increasingly turning to currency forwards and options in the wake of recent market volatility, says Jonathan Pryor, head of FX dealing at Investec Corporate and Institutional Treasury.
 
SMEs typically buy hedging products through a traditional bank or a broker, says Pryor, but this bank-dominated market is ripe for disruption.
 
"I do think we are on brink of that changing, apps and technology will open up the market pretty soon," says Pryor.

Kantox, a non-bank provider that offers currency forwards in 23 currencies, is just one of the companies heading that change.

Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter