Managing foreign currency exchange for your international program is just as important as managing all the other areas surrounding 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 nearly two trillion U.S. dollars are traded in the foreign exchange market, where volatility has become the norm. From April 2002 to April 2005, the U.S. dollar weakened by 20.8 percent against a basket of currencies, including 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 U.S. dollar has rebounded across the board after the Federal Reserve raised interest rates by 25 basis points in mid-March and hinted at a faster pace of policy-tightening to come. The dollar recently touched on a five-month high against the yen and two-month peaks against the euro, Swiss franc, and Australian dollar. The dollar also touched on a one-and-a-half-month high versus the British pound. The recovery has been the result of the U.S. economy's improving outlook and expectations that the Fed will continue raising lending rates throughout 2005. Higher U.S. interest rates make short-term dollar deposits more attractive to global investors. Those factors, at least temporarily, overshadowed the market's concerns regarding America's massive trade, current account, and budget deficits, a theme which has weighed on the dollar for more than three years.
The current volatile foreign exchange environment can offset profits, squeezing budgets, and lowering earnings for meeting planners. While the currency volatility can't be controlled, you can take the following steps to protect your business throughout 2005:
- 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 currency. By doing this, the buyer decides the exchange rate — and U.S. dollar cost — at which to purchase the currency. 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, accommodations, meeting space, or other services, it is critical to plan how to hedge against currency risk. Because most planners bid and secure meetingall year long, you should consider using hedging tools, such as forward contracts.
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, 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.
Monitor the Market
Staying informed about 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 margin you could save when purchasing or selling foreign currency.
To take advantage of favorable short-term rate fluctuations, select foreign exchange suppliers who offer complimentary currency monitoring services. Seek a monitoring service that tailors its program to provide you with as much or as little information as you decide is necessary.
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.
Helen Skinner is manager for Ruesch International, a leading global financial institution specializing in international business-to-business payment products and solutions. She is responsible for managing client relationships for the California region and can be reached at Helen.firstname.lastname@example.org.