The total value of Irish exports to Britain in 2019 was €13.5 billion and the value of imports from the UK was €18.7 billion. So the role of Currency Exchange for Businesses in Ireland can be very significant.
Sterling fell sharply against the Euro after the Brexit referendum and there has been exchange rate volatility related to Brexit progress since then.
In the event of a no-deal Brexit- a weaker pound could coincide with an increase in tariffs on those exports. Weaker Sterling and a stronger Euro could also bring about increased competition from UK suppliers and online retailers.
Check the latest Sterling to Euro Rate here
The majority of Irish firms with a direct trading relationship to the UK are SMEs. These are the businesses that could be hardest hit by any Brexit related currency issues.
How Exchange Rates Can Affect Profits.
Here is an example of the effect of exchange rates on profits using actual exchange rates on the dates concerned :
- An Irish business agreed to sell goods for a price of £100,000 GBP to a UK retailer on 22nd June 2016.
- The Irish business calculated that the payment would be worth €130,000 Euro on conversion.
- When the invoice was paid 5 days later, (after the Brexit referendum result) the £100,00 GBP was only worth €120,000. This was a reduction of 7% , almost halving their expected profit margin of 15%.
If that business had secured a specified exchange rate in advance of the payment date – they would have saved thousands. It is possible to do this with the help of currency exchange specialists. They are able to set up something called a Forward Contract . More details on this later.
There are several other methods that businesses can use to reduce currency risk. By locking in favourable exchange rates a business can achieve predictable profits and not be at the mercy of the currency markets.
We have listed some specialist currency exchange brokers below that will be able to advise you more on the available options.
(See the end of the article for some examples)
Currency Exchange Specialists
Fexco is an Irish firm established in 1981 in County Kerry that now employs over 2,300 people in 29 countries. If your business needs to pay overseas suppliers or transfer funds to global partners, Fexco has several well-known Irish businesses as their clients – such as NUIG , DCU , Concern and Bon Secours.
Fexco will give you access to a dedicated account manager who will get to know your business, help to identify and understand the foreign exchange risks to your business and then develop hedging strategies to suit you.
Fexco Corporate Payments are authorised as a payment services provider by the Central Bank of Ireland and are also regulated by the Financial Conduct Authority for the conduct of payment business in the UK.
You can choose between using their online international payments platform or dealing over the phone with an experienced FX specialist. You can find out more at the Fexco Website
Currency Solutions is a UK based currency specialist firm that can help businesses identify and understand their FX risks. They will assist businesses in identifying suitable hedging instruments and proposing a strategy with costs, benefits and risk.
Business customers get a dedicated account manager and instant access to the market via phone or online.
Currency Solutions are authorised by the UK Financial Conduct Authority. You can call them on their Irish number 01 431 1344 or on their UK number 0044 207 740 0000 .
You can also visit the Currency Solutions website here for a free no-obligation quote and they will call you back. Once registered, you can use their online platform for transfers of up to £50,000 (for business customers ).
Transfermate is a Dublin based currency specialist firm that specialises in Currency Exchange for Businesses. They are regulated by the Central Bank of Ireland. By utilizing TransferMate’s global payments network of local bank accounts, businesses can reduce exchange fees. Transfermate are backed by AIB and ING.
They deal with both small and large businesses. One example is University College Cork who receive thousands of multi-currency payments from international students. By using TransferMate the University reduced their bank charges and got better exchange rates.
TransferMate offers a range of apps that integrate with popular accountancy software such as SAP, Sage, QuickBooks and MYOB.
Find out more and set up a free online account via their website
If you are a sole trader business that just needs to carry out fast currency transfers with low fees – you could use Currency Fair.
Currency Fair is based in Dublin and regulated by the Central Bank of Ireland.
Everything is done online or using their smartphone app. You are in full control of the transfers and payments. CurrencyFair will not be able to facilitate any of the hedging tools outlined below. If you want help or advice , then CurrencyFair may not be the best option for your business.
Examples of Currency Hedging Tools
A forward contract is one of the most widely used foreign exchange hedging instruments. It is an agreement that a business will buy a specific amount of foreign currency at a pre-determined rate by a certain date.
These forward contracts enable an importer to lock in the price to be paid, or an exporter to ensure the price to be received. There is no upfront cost for a forward contract – but you could end up getting an exchange rate that is less favourable than the exchange rate on the day. If you don’t go ahead with the exchange as agreed there may also be a breakage fee.
Currency options: (Sometimes called a Vanilla Option) –
This is the equivalent of an insurance policy. In return for paying an up-front premium, the holder of the currency option gets the right (but not the obligation) to buy or sell a currency at a pre-determined price on a given date. But if exchange rates go in your favour – you can just take the exchange rate offered on the day (spot rate) if it works out better for you.
Example of a Vanilla Option:
In December 2018 an Irish business wants the right but without the obligation to sell GBP £100k at €0.90 on the 30th of March 2019 . (Getting €111,111 in return). Here are examples of two possible outcomes on maturity:
a) On March 30th 2019 – the GBP spot rate is €0.87 , so they sell GBP at the lower prevailing rate (and get €114,942).
b) On March 30th – the spot rate is €0.94 which is higher than the option agreed of 0.90. So they can exercise their right to sell at 0.90 and get €111,111 instead of €106,382
Collar : (also known as a Cylinder)
A Collar FX provides you with an upper and lower limit for a specific amount of time at zero cost. You will be guaranteed the rate will not drop lower than the “Protection Rate” whilst allowing you to fully participate in favourable exchange rate movements as far as a predetermined Cap Rate.
If, at expiry, the exchange rate on the day (Spot Rate) is more favourable than the Cap Rate, you will be obliged to transact at the Cap Rate.
However , if the Spot Rate is between the Protection Rate and the Cap Rate you can take the spot rate.
But if the Spot Rate is less favourable to you than the Protection Rate, then you have the right to exchange your currency at the Protection Rate.
This type of deal provides a zero-cost strategy and provides full protection against the depreciation of the spot rate while allowing the customer to partially benefit from an unlimited appreciation of the underlying spot rate.
Upon expiry, if the spot market is more favourable than the Protection Rate, you have the obligation to transact a predetermined percentage of the notional amount at the Protection Rate, whilst the remaining proportion can be exchanged at the favourable spot rate.
Participating Forward Example :
An exporter in Ireland will be receiving £100,000 GBP in 6 months time and will need to buy EUR with it to pay wages etc. The current spot exchange rate is 1.11 .
The business believes that GBP may weaken so enters into a “Participating Forward” at €1.10 with a participation rate of 50%.
Scenario 1 : If, in six months time, GBP has strengthened and the spot rate is €1.13, the customer will have to convert the £100,000 GBP at the pre-agreed rate of rate of €1.10. (Grand total of €110,000)
Scenario 2 : If the sterling rate in 6 months time had dropped to €1.06 the customer only has to transact at the market rate of €1.06 on 50% of the total (GBP 50,000) but can sell the remaining 50% (GBP 50,000) at the agreed €1.10. (Giving a grand total of €108,000)
Without any forward contract – the outcome would have been €106,000