I’m not really a trader but I run an ecommerce business. I buy my products abroad and must pay in USD, my home currency is GBP.
I have outgoing payments over the next 12 months of around 400-500k USD. Right now we have a very good rate on GBP/USD so I would normally do a forward contract to secure this good rate for 30-50% of my projected outgoings, so total around 200K USD.
I work with 3-4 FX companies who can arrange this contract for me, and they will compete to offer the best rate.
My question is in 2 parts:
How do I accurately compare their offers when the exchange rate is always changing?
What is a normal ‘cut’ % pips or whatever for the broker to take on a deal like this?
As you can tell I don’t know much but since there is a lot of money at stake here would appreciate your advice.
What you’re experiencing here is known as currency hedging, and totally normal for global business that deal with currencies outside of the domestic currency, regardless of importing or exporting goods.
The reason for taking out a Forward, Future or even a Currency Option contract is to lock in an agreed exchange rate for an agreed currency value at an agreed future date. It’s obviously good for business to now right NOW either how much an import will cost at a future date, or how much they will receive from exporting at a future date. By knowing this, you as the business can make rational financial decisions.
What you have to look at is this…
What is the cost of taking out these hedging currency contracts (the premium)
What is the cost of not taking out a currency contract should exchange rates move against today’s rate that would have been locked in by taking out the above contracts.
For this you need to talk to a financial analyst as this is a specific field of knowledge, however I will say that global businesses rarely fail to take out some degree of future currency contract - they want to know future costs today.
As for the cost (premium) of these various hedging options, they will vary from bank to bank, and will also vary on the actual value of the currency being exchanged at the future date.
You mentioned Futures, an obligated contractual agreement to exchange at a future date, regardless of if the currency rate is in your favor or against you. I would also look at currency options, these are slightly different as you have the right but [U]not[/U] the obligation to exercise the option (take the future agreed rate) upon expiry (the date at which you will make the currency exchange). The costs of not taking this option at expiry is known as the premium (which is payed regardless of exercising the the option).
So, if the currency rate moves in your favor, and the move covers the cost of the premium then you are actually better off financially by not exercising the option. So take a little look into options (nothing to do with binary options, so dont even look at those - we are talking about real contracts).
When I go to take out this contract I will be offered a rate: 166.XX, then I will call someone else and they will offer 166.XX slightly higher or lower. However during the time between quotes the rate will have changed, and then changed again by the time I compare them. So how do you accurately compare quotes in this situation?
Also, considering the exchange rate is at time of writing 167.28, what is a reasonable cut for the broker to take? they usually will offer something in the region of 166.20 - does that seem fair or not? Do they work on a % basis or a $ basis or what?
I have to say, a non-speculator on this site is a rare thing. Anyway, comparing quotes over the phone over something as volatile as the GBP/USD exchange rate doesn’t sound feasible. It’s hard enough as it is to track price on specialised trading software, and software updates prices every tick (~1 second or even faster). I bet your phone calls go like this:
You: "GU?"
Broker: “20” (he might not even bother with the first 3 digits)
<hang up>
From what I’ve read from brokers-turned-authors, it’s a pretty cut throat world, and they are obviously trying to return the best profit they can, much like any business really. A price of 1.6728 is 108 pips higher than 1.6620, which is massive for speculators. You could always try using that number of 108 to generate competition between your FX brokers. It might make you sound like you know what you’re talking about but not sure how well that would go down though.
Would limit orders work? I know non-speculator FX companies can place spot limit orders but not sure about future contracts.