I see the Central Bank of Zimbabwe has introduced a 100 trillion dollar bank note. As of time of writing this is apparently worth about 225 Euros, but with inflation running at more than 200 million percent, by this time next week it probably won’t be the price of a teabag. Market traders have resorted to pricing their goods in foreign currencies in the hope of hedging against losses.
Clearly this is an extreme case, but there are some important parallels to be drawn with our own situation in the UK.
Last year the Pound’s value against the Euro fell from 1.37 in January to 1.02 in December. This meant that anyone needing to buy Euros, be it a commercial importer or a British pensioner living overseas, was paying over 25% more for their Euros by the end of the year than at the beginning.
Businesses, say, buying raw materials from overseas, who had put a Euro conversion rate of 1.30 into their budget, saw profits slashed if not wiped out altogether. Riding on the previous few years of boom, their only goal was to increase sales and revenue. The problem was, they forgot that it’s not revenue that counts, it’s profit, and if your profits are being eroded to the tune of 25% in a year, there ain’t much left.
It’s never too late to learn the lesson. We live in difficult and unpredictable times. Economies and markets are volatile and will remain so. It would be a brave person who can say with any confidence where the Sterling/Euro rate will be in another twelve months. It might be where it is now. Or it might be 1.40, or less than parity. But, one thing we do know is that the name of the game in business is to eliminate risk, and that means eliminating foreign exchange risk as well.
Hedging forward is incredibly simple, cheap, and sensible. Contrary to some views, it is IMPOSSIBLE to lose money by taking out a forward hedge. The worst that can happen is that you don’t benefit from a windfall profit from an upward swing in exchange rates.
But businesses are not there to take gambles on exchange rates. If you set a rate in the budget at the beginning of the year, then for goodness sake make sure that’s what you’re going to be getting at the end of the year. It’s the only way to protect your profits.
Zimbabwe’s market traders have got the idea. Why haven’t we?













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