The COVID-19 crisis is an unprecedented economic disaster and experts state that the recovery process will be slow and painful. There will be no country left unaffected by the global economic recession.
Moreover, there is a lot of damage that we have yet to see. Right now, the situation seemed to be getting better. However, UK economic recovery took a nosedive in response to the renewal of restrictions.
Right now, no one can say how long the pandemic and subsequent restrictions will last. But it’s clear that the process of recovery can’t fully begin until then. Therefore, there is much volatility for both stocks and FX markets in the future. And those types of volatility affect businesses and investors greatly.
However, there is some good news now. For the longest time only big companies had access to hedging, which is the best protection from foreign currency exchange (FX) risks. But right now, FX companies make hedging tools accessible for any businesses and even private clients.
They specifically offer currency forward contracts, which are the most popular hedging solution due to its efficiency and affordability. More importantly, leading companies also offer currency guidance that can help a business greatly.
This is the type of service that will alert you, for example, when the best time to buy a GBPEUR forward contract is. Relying on expert guidance helps business owners who aren’t professional forex traders to make decisions that will benefit their companies in the long run.
Why Currency Forward Contracts Have Become a Necessity for Businesses Today
For all that the coronavirus pandemic is a unique type of disaster, a global economic recession is nothing new. A high level of volatility that comes from the lack of certainty in anything is expected for such periods.
Moreover, looking at previous recessions, it should be rather easy to see the pattern of both crashes and recovery rates for different industries.
All this considered, UK people, in general, and business owners, in particular, shouldn’t have been too distressed. The Pound Sterling has always remained rather stable during such times.
It’s one of the world’s leading reserve currencies and the UK economy is impressively stable in its steady growth. Therefore, business owners could have kept ignoring currency forward contracts and other hedging tools, as they usually do.
The recession was sure to cause trouble, but it shouldn’t have been a complete disaster
However, this particular crisis struck so hard and fast that it immediately threw off any forecasts. There was no steady downturn in several specific industries that led to a more rapid crash. Instead, the world has shut down almost overnight. No factories working, no trade, no businesses functioning beyond the few that fuel remote work.
Overall, this was the most rapid and sharp economic crash in history. So, it’s no surprise that everything has become volatile.
That said, the UK should have clung to some relative stability still due to the GBP’s role in the global FX market. But recent events made it quite weak even before the pandemic crisis struck.
The Pound was still reeling from Brexit and all uncertainty associated with it. The economic consequences of that created uncertainty for many markets as importers and exporters were greatly affected by the change.
When the pandemic caused an unprecedented global economic crash, the level of volatility skyrocketed. It happened so fast, many people believed it was too late to invest in a GBPEUR forward contract or some other type of hedging. That’s because the Pound sunk to a record low as well.
It has recovered somewhat since then. But the slowdown of recovery caused by the second wave of pandemic restrictions shows that you can’t trust this. Therefore, now is the right time to start looking into FX forward contracts and other hedging options.
These tools can offer at least some protection to small businesses that are already on the brink of failing.
How Hedging Tools Can Help Save Businesses
Currency forward contracts are the most popular hedging tool, but they aren’t the only one. There are also:
There are several types for almost each of the options named that differ in specific details. However, it must be noted that forward contracts are the easiest for small businesses to obtain. That’s because FX companies usually offer them but only a few, if any, of the others.
It’s essential to understand that the very fact that a small business owner can purchase an FX forward is a recent development. Not so long ago, all hedging tools were offered by banks only. And those only allow their VIP and corporate clients access to hedging.
Therefore, SMEs in general couldn’t have any serious protection against currency risks. This is one of the reasons why few of them dared to go global.
But this situation changed with the appearance of FX companies. These companies launched as an alternative to banks that offered much lower costs for international money transfers.
Affordable and accessible hedging for everyone has also become one of the main selling points for these businesses. Today, the UK boasts the fact that the majority of leading FX companies are based here. They are WorldFirst, Global Reach, and Currencies Direct to name a few.
Are Currency Forward Contracts the Best Hedging Tool for Small Businesses?
Being easily accessible isn’t the only reason why currency forward contracts are so popular today. Other advantages of this specific hedging tool include:
To put it in simple terms, your GBPEUR forward contract, or a forward for any other currency pair, is stable and affordable. This tool works by giving you a chance to buy currency at a specific rate in the future. You are buying an obligation, which means you must fulfill the contract or extend it if this is an option.
This means that on a fixed day in the future, you will be able to exchange GBP for EUR at the rate you know already. No changes in actual FX rates will affect this number. Usually, forwards are a year long. Therefore, a small business gets some much-needed stability for planning a budget.
Also, note that the FX rate in the forward contract is calculated using a set formula. Therefore, fears of volatility and currency forecasts won’t affect this rate at all. This gives one a chance to save a lot of money in such uncertain times.
Bottom Line: Changed Times for SMEs with Easily Available FX Forwards
As new restrictions come into force, the economic recovery of the country is slowing down. Considering that these restrictions could last for months yet, the economy will take even longer to stabilize and recover.
Therefore, investing in a GBPEUR forward contract might be a good idea for many businesses. Of course, depending on your specialization and other factors, you might need to invest in FX forward contracts for other currency pairs as well.
Today every business, no matter how small, has a chance to do this with the help of FX companies. They truly revolutionized the industry and offered SMEs a greater chance of survival in these volatile times.
All things considered, there is no excuse for a small business today to not use currency forward contracts to protect itself. So, you should move right now in order to avoid potential losses if the Pound crashes.
