3 Tips for Managing Foreign Exchange Better


Based on research from the Bank for International Settlements, the foreign exchange market is a $5.3 trillion daily market.  It is perhaps one of the most complex markets in the world. These three simple takeaways will help treasurers navigate the market better and work with their financial counterparties more effectively, regardless of their industry.  

First: Understand the motivation for trading by your financial counterparty.

Financial providers want to see you succeed in your business and continue to prosper, but it is also important to understand the motivation in trading on your behalf.  There are not very many transactions you have with your financial counterparties where they act as both your principal and your agent at the same time—foreign exchange is one of them.  As James indicated, their primary motivation generally is margin driven. There is typically higher margin in products that are less plain vanilla. It’s important to anticipate this—ask what the credit spread is, including the profit spread in your larger deals, especially as you move away from the plain vanilla products. This will give you an idea where your share of the wallet is being allocated. Having a better picture of your bank spend and tracking it will position you to negotiate better pricing as you collect the data over time.

Second:  Establish it in writing.

Ask your financial counterparties to put in writing an established spread on foreign exchange transactions.  The spread can be different for different currencies, tiered for size or amounts and transaction types such as cash letters, forwards and options, etc.  Deciding on the base index for the spread is important too so that companies have better transparency and traceability.  Having the arrangement in place is important, but tracking the spread is important too. The majority of companies that track their spreads use Excel. Utilizing foreign exchange portals will help automate the process and improve transparency as well.  Any differences noted should be discussed in recurring meetings with counterparties or brought to their attention sooner if material.
Third:  Trade only for your business.

Oftentimes companies are presented hedging ideas and market trades from their financial counterparties that can be good solutions if they make sense.  Understanding the underlying risk of those proposals and comparing them against your business and weighing the possible outcomes is prudent foreign exchange management.  A good provider should always have a fundamental understanding of your business and your underlying goals in your hedging program.  Each company has different risk tolerances, time horizons and philosophies towards hedging—its best to make sure the market proposals serve those interests first.


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