Graham Stanton shares his thoughts on the effect of the exchange rate

 

The medical travel and medical tourism sector is, by nature, an international business. Many of the transactions and payments in this industry are in foreign currencies.  Often, these payments are agreed in the present, but made in the future, which means there are business risks associated with constant fluctuations in exchange rates. This can make it difficult to protect the profit margin you have so carefully factored into your arrangements. Managing foreign exchange risk can therefore be key to successful budgeting.

So, what’s the best way to approach this business challenge? Here are World First’s top ten tips for controlling your budget in the medical tourism industry when goods and services are purchased from abroad.

1. Sort out the pricing and then set the budget

Look ahead at the known costs and ensure that these costs are covered. Fix these costs in your local currency using forward contracts or currency options at the time of setting the budget. With a significant volume of international payments within the medical industry each month, it is important to understand how exchange rate fluctuations can affect your business and also what products exist to reduce your exposure to these movements. Read the World First white paper 'Hedging for the medical industry'. It provides a guide from the most simple to the most sophiticated in tailored hedging tools, some of which you will not have seen before.

2. Hedge no less than 50% at the time you set budget

If you don’t like the idea of buying all your currency in advance with forward contracts or currency options, just make sure you hedge 50%, no less.  This simply reduces the effect of large rate moves.

3. Be realistic with rates

Formulate a worst case scenario to budget against. It is normal to set your budget 2-5% below where the exchange rate is currently trading to allow some room for movements that are not in your favour.

4. Research views from a few different sources

This will help you to make an informed decision about expected foreign exchange rates. There is no cost to sign up for regular updates from foreign exchange specialists. World First provides a daily update on the currency exchange markets.

5. Don’t base your budget on comments in the press

Remember that a wild statement about which way an exchange rate is going gets media coverage. Small rate movements don’t make stories.

6. Conventional solutions are not always the best

Instead of simply fixing future payments at a forward rate, use hedging strategies (i.e. currency options) that are tailored to fit your exposure, currency forecast and risk level. This will enable you to protect yourself from adverse rate movements while still benefitting from favourable rate movements. There are experts to assist. An independent boutique foreign exchange broker, like World First, is like a plastic surgeon working to get the perfect fit versus the off-the-shelf product.

7. Take into account how the hedge will affect the business cash flow

Different foreign exchange trades carry different levels of risk and you need to be clear on what implications rate moves will have. Also consider whether you are paying a deposit or getting a credit line but, hedging is flexible, so a strategy can be designed to suit you and your business’s cash flow.

8. Sometimes the best hedge is the one that’s best for cash flow not just for predicted rate moves

A good foreign exchange provider should take all of your company’s business needs into account when assessing which hedge to recommend. Any hedging strategies must fit in with your company’s day-to-day cash flow requirements.

9. Mix and match

Don’t be afraid to have a variety of products in place for a budget cycle e.g. 30% forwards, 40% options and 30% spot. Different products may suit different elements of the business and diversification can help spread risk.

10. Assess your foreign exchange provider

As you would for any other business before entering into an agreement, carry out the due diligence on your foreign exchange provider. Are they FSA regulated? What is their balance sheet like? Get references from clients that deal with them.

For more information on protecting your business from negative exchange rate movements in the future, please see our white paper. Alternatively, to discuss your company’s particular currency requirements in more detail, please contact us directly:

Phone:                 +44 207 801 1058
Email:                   [email protected]
Website:               www.worldfirst.com

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