Most small businesses, if they are successful and are not tied to their local area come to a point when they think about providing goods or services to a larger client.  Or they may come to a point where they can think about buying in a good or service at a really cheap price from abroad.  The only problems are currency fluctuations.

A sharp move in currencies may not only wipe out the advantages of trading with another country, but they may make it into a sharp disadvantage.  It may be possible to negotiate for the other side to trade in pound sterling, but this depends both on buying power and whether the other side is willing to trade in foreign currencies.  This may be possible with someone from Canada, Sweden or Australia, If the other side is in the United States –Britain’s biggest single trading partner – or in the Eurozone – where more than half our manufactured imports come from – then they are likely to be quite reluctant to do this.  If they are willing to deal in your currency, and this will also depend on your relative size to them, they may drive a hard bargain.

Spread betting and contracts for difference are a good market to try to ameliorate the risk.  Currency markets are an active part of the spread betting market, with Capital Spreads reporting that a third of their contracts are for currencies.  By betting that the currency will go the way you do not want it to go, so if you’re exporting to France and taking Euros then you would bet that Euros will fall then you can be covered for some of the risk.  It’s a good idea to have a stop loss if Euros rise – which will not be a problem as your payment rises in value.

If it is a longer term relationship then it is a good idea to use contracts for difference as there is no date at which this expires.  It should also be the case that you don’t try to insulate yourself against all the risk of an adverse currency movement, just some of the risk as this will be considerably cheaper.

Last Updated: January 27th, 2021