From flash floods to storms and bush fires, extreme weather events caused by climate change can upend supply chains and distribution networks around the world. This can reduce the speed of product delivery, lead to the suspension of products and the closure of supply factories.
For a first-hand example of supply chain vulnerability, we only have to look back to the start of 2021 when severe flooding triggered by Storm Christoph almost delayed the UK’s Covid-19 vaccine rollout. Coupled with currency volatility and the many supply chain interruptions that caught out hundreds of companies in the wake of the pandemic, this example highlights how vital it is for UK SMEs with overseas operations to think about implementing robust risk management and FX strategies.
Ensuring supply chain continuity in times of uncertainty
Global supply chains can give you lower purchasing costs, access to a larger customer base, a greater variety of products and an increase in sales. In times of uncertainty, however, be it acute weather events triggered by climate change, Brexit, or Covid-19, it’s paramount you maintain supply chain continuity, manage cash flow and ultimately protect your bottom line.
One of the biggest risks associated with global supply chains is foreign exchange (FX) risk. Foreign exchange rates are influenced by a number of factors ranging from economic stability to geopolitical risk. This means they can fluctuate at any point over the course of a supply chain agreement, making it vital you evaluate your exchange rate risk.
How to mitigate exchange rate risk
One way to increase your resilience to climate change is to adopt a risk management strategy that will help protect your business against FX risk and exchange rate volatility affecting import & export prices. Whilst most events triggered by climate change are impossible to plan against, introducing a hedging risk management strategy can prevent your business from eroding its profitability by:
- Adding predictability to your future FX rates
- Increasing visibility of your cashflow
- Protecting your internal budgets and profit margins from foreign currency fluctuations
- Helping you achieve price stability over a reasonable time period
If you don’t introduce a hedging risk management strategy:
X You may eliminate cashflow predictability and put your internal budget rates at risk
X Your business could suffer potential losses to profit margins because of currency fluctuations
X You could need to raise prices to protect profit margin following a significant change in the rate
How can WorldFirst help?
If you’ve clients or suppliers abroad, hedging your exposure to movements in exchange rates can have several benefits. For over 16 years WorldFirst has offered currency hedging options for businesses and can help you save time and money by better managing your currency exposure.
Our offering includes forward contracts – a hedging product that enables you to protect your business from currency market volatility by fixing the rate of exchange over a set period on an agreed volume of currency. There are different forward strategies which can be executed depending on your individual business needs, including fixed and flexible forwards.
With WorldFirst you can use a forward contract for payments for goods, services, or direct investment (making a capital investment in an enterprise to obtain a lasting interest in it). You will be able to lock in a rate 24-months in the future. Here are some of the different options WorldFirst offer:
Allows you to agree an exchange rate today for a fixed amount, to be used on an agreed date in the future (which is the maturity date).
Gives you flexibility on when you take delivery or drawdown from a fixed rate of exchange throughout the contract up until the maturity date.
Allows you to purchase a specific amount of foreign currency within a range of settlement dates, known as windows. The windows are utilised to achieve a better exchange rate than that of outright forward contracts.
Benefits of a forward contract
- To hedge (lock in a rate) a rate to cover an invoice that is dated in the future
- To hedge a rate to cover a percentage of a company’s forecasted currency requirements for future supplier payments
- To hedge a rate for project work that’s paid in stages for up to 24-months
- To protect forecasted exporting revenue from currency volatility
For more information, contact WorldFirst. Their team of dedicated relationship managers will be happy to talk you through the risks and opportunities involved.
Hedging currency risk: A free guide for businesses
Adverse currency trends can have a huge impact on your business earnings and bottom line. Find out how to help your business mitigate FX volatility from FX liabilities and income with the WorldFirst FX Hedging Guide.