Managing foreign currency exchange for your international program deserves the same attention you'd give to managing the risk surrounding every other part of your event. Here's how to formulate a plan so that you don't expose your budget to the volatile foreign exchange market.
Every day more than one trillion U.S. dollars are traded in the foreign exchange market, where volatility has become the norm. From March 2001 to March 2004, the U.S. dollar weakened by 25 percent against a basket of currencies comprising America's major trading partners: the euro zone, Canada, Britain, Japan, Australia, and Mexico. Many factors contributed to the dollar's decline, and market participants are unsure whether the dollar has hit bottom.
The current weak dollar environment is offsetting profits, squeezing budgets, and lowering earnings for meeting planners. While the currency volatility can't be controlled, you can take steps to protect your business throughout 2004. The following tips will help to increase your bottom line and budget more accurately:
- Set up a foreign exchange risk management plan.
- Monitor the market for short-term opportunities.
- Execute orders when favorable market opportunities arise.
Establish the Currency
In the past, the U.S. dollar was the dominant world currency, and U.S. companies conducted business abroad with dollars in order to shift the impact of currency risk to overseas suppliers.
But today, savvy planners are taking control of foreign exchange transactions by working in their client's or supplier's foreign currency. By doing this, the buyer decides the exchange rate — and U.S. dollar cost — at which to purchase the currency. According to The Bank for International Settlement's “2001 Triennial Central Bank Survey of Foreign Exchange,” 90 percent of international transactions have the dollar on one side of the transaction. This means that the currency has to be exchanged either here or abroad. Working in foreign currency eliminates the risk of sending too much, too little, or being re-billed.
Many meeting planners look for convenience and low fees or rates when selecting a foreign exchange supplier. They usually buy when a payment is due, compiling their account payables, and try making larger transactions at once. Whether it's for ground transportation, hotel accommodations, conference centers, or other services for international events, it is critical to plan how you will hedge against currency risk. Because most meeting planners bid and secure meetingall year long, planners should consider using hedging tools, such as forward contracts.
Forward: A Risk-Management Tool
Once your company has established an obligation to pay an amount of foreign currency, your costs are exposed to fluctuations in the foreign exchange market. These risks can be eliminated through the use of a forward contract, which allows you to purchase a specific amount of foreign currency at a current rate of exchange for delivery on a set date, typically between a month and a year in the future. Forwards can be bought or sold versus the U.S. dollar, allowing you to cover both foreign payables and receivables.
Once the exchange rate is locked in, the U.S. dollar amount is set for the duration of the agreement regardless of subsequent market movements. A secured rate allows meeting planners to proceed with price listings and budgeting plans without currency fluctuations eroding profit margins.
What if you reserved hotel space for an overseas meeting to be held in six months but the invoice won't arrive until next year? How will you know what the funds will cost when you convert the currency on a future date? By using a forward contract you lock in a current rate of exchange so you fix the cost of the currency.
Generally, the only requirement to enter into a forward contract is a deposit of between 10 percent and 15 percent of the dollar cost of the funds. The most notable advantage of the forward contract is that it allows you to secure a profit margin and budget for services effectively. (See box below for an example.)
Monitor the Market
Staying apprised of relevant world events and rate fluctuations is one of the most basic means of managing foreign currency. Underlying factors such as economic statistics, politics, and social conditions drive the foreign exchange market, affecting the amount you'll pay and the potential margin you could save when purchasing or selling foreign currency.
Choosing a Foreign Exchange Expert
Meeting planners are not expected to be experts on the foreign currency market, but it is important that you choose a foreign exchange supplier who is. Foreign exchange is a service provided by both banks and foreign exchange specialists. As with any commodity, market expertise, timely updates, responsiveness, attention to detail, rates of exchange, and service fees will differ from one supplier to the next.
Comparing service fees as well as exchange rates is an important consideration when choosing a foreign exchange supplier. Savings realized by a favorable rate of exchange can be quickly lost by high service charges. And remember, you can always compare and use more than one supplier for your transaction.
Whatever your foreign exchange exposure may be, seek the advice of a competent foreign exchange supplier that will tailor a program to meet your specific needs.
Marie N. Hollein is regional director for Ruesch International, Washington, D.C., a leading global financial institution specializing in international business-to-business payment products and solutions. She is responsible for the D.C. region and university sales organizations. As the head of sales for this region, Hollein leads business development activities and manages client relationships in 33 states including the District of Columbia and Puerto Rico.
Success Story: Company Reaps Huge Benefits Using Forwards
Morris Meetings & Incentives, LLC (www.morrismeetings.com), a private division of Morris Murdock Travel, has been in the meeting planning business for more than 20 years. With offices in Utah, Idaho, Nevada, Wyoming, and Florida, MMI generates nearly $20 million in sales per year.
One of the major challenges MMI faces is understanding the high fluctuation of currency in the market and being prepared to respond. “It is critical for us to know how much currency to buy so we can manage our risk as the market changes,“ says David Peaden, controller, based in the company's Salt Lake City office.
Hedging against currency risk is an important strategic approach, especially for third-party planners. The dollar is so devalued today that MMI would not be able to provide meeting planning services for the quoted price for clients if forwards [forward contracts] were not used to manage risk, says Peaden.
Prior to using forwards, MMI used spot purchases and wired the money to vendors for all payments. By contacting a payment provider, it would obtain the current exchange rate in the spot market. Then, its payment provider would execute the transaction. The “spot exchange rate” is the current value of one currency compared to another currency. Generally, spot purchases are used for immediate payment needs.
In addition to keeping the price down, the use of forwards saves time, increases productivity, and reduces anxiety, because by locking in the rate, meeting planners can more effectively manage their budgets for the fiscal year.
Early in June 2003, MMI purchased three forward contracts for a total of 253,973 euro at $1.1710 U.S. The delivery dates were between October 2003 and May 2004. Seven months later in mid-February of 2004, the exchange rate for the euro was 1.278. Therefore, over that time period, MMI saved nearly $27,000 by implementing forward contracts as a risk-management tool. From June 2003 to February 2004, the dollar weakened by 8.3 percent in value against the euro overall.
As another example, in late March 2003, MMI purchased four forward contracts for a total of $124,400 Canadian at an exchange rate of 1.4950 U.S. The delivery dates were between August 2003 and January 2004. By December 31, 2003, the exchange rate was 1.2870. Overall, the dollar decreased in value against the Canadian dollar by 14 percent. During that that nine-month period, MMI saved more than $13,000 by using forward contracts to hedge against risks.