In times of heightened market volatility, it pays to take a step back and think about the currency decisions you're making and why...
Market Moves can be a Risk or an Opportunity"
When prices move rapidly and by a large magnitude – fast and far – unrealised P&L on unhedged positions shifts in value 1:1. Depending on the underlying cash flow direction, large price swings can give rise to a profitable opportunity or a risk of loss.
Many analysts (or pseudo-analysts) claim that price movements were obvious after the fact. Nobody truly knows! Hindsight is 20:20. The solution is preparedness: working to a structured program and insulating the business from unfavourable fluctuations.
On Trade Timing and Delaying Decisions:
The solution is preparedness: working to a structured program and insulating the business from unfavourable fluctuations.
When initially initiating a currency program, a favourable entry point can be exploited with urgency. However, markets wait for no one.
Delays in decision-making can erode prior favourable entry terms and lead to poor, rushed, or regrettable trading decisions.
When faced with such an erosion of profit, one must avoid the temptation of an emotional, market-directional decision:
- “There will be a correction” - what if not?
- “The rate will keep rising” - what if not?
- “It’s gone too far” - what if it hasn’t?
- “It can’t get worse” - what if it does?
Remember:
- The market can stay irrational longer than you can stay liquid
- You are not equipped with any special insight into the market’s next price move
- Nobody knows the next price movement - especially the person you trade FX with
A Simple Solution
In times of profit erosion for unhedged underlying exposures, I tend to prefer simple solutions that give flexibility for future adjustments, decisions, and modifications.
Participating Forwards can be a highly accommodative and practical solution, if expensive compared to the equivalent Forward Contract from the outset. To learn if this might be an appropriate solution for you, just contact us.
But this solution, with its low obligation compared to protection, can be used to great effect in preventing further losses whilst allowing for gains via favourable future exchange rate fluctuations. Additionally, re-hedging to capture favourable rate movements or restructuring to create a novel payoff is straightforward.
Keeping things simple and flexible delivers the most effective outcomes – whether this means a strategy utilising Forward Contracts, FX Options, or a combination of products, less is often more!
This is generally my approach with clients – sensible, rational, unemotional conversations based on measurable outcomes, aligned incentives, and everybody winning. Please reach out if you’re finally ready to take a different approach with your business’ currency management.
Cut Through the Noise
We're proud to work transparently with our clients, and we work hard to break the asymmetry of knowledge and information in the FX market.
You can contact us for a review of your currency processes and for our guidance and suggestions at info@okumarkets.com or 0203 838 0250.
Thanks for reading 👋
