Thousands of small and medium-sized enterprises (SMEs) are leaving themselves exposed to significant financial losses because they have not protected themselves properly against foreign exchange (FX) movements, according to new research* commissioned by the corporate treasury desk at Investec Capital Markets, a division of Investec Bank. The findings are of particular concern to UK businesses given recent FX volatility which has resulted in sterling losing more than 16% against the Euro over the past year, with more market turbulence anticipated. The Euro is in uncharted territory against sterling and many businesses are feeling the pressure.
Investec calculates that a company conducting £2 million of foreign exchange could be exposing itself to losses of up to £320,000 by failing to hedge their FX transactions. With 85% of small and medium-sized companies that trade in foreign currencies expecting their exposure to either increase or stay at the same level over the next 12 months, there is a need for businesses to reconsider their existing strategies.
The research reveals that 60% of SMEs expecting to conduct business in a foreign currency during the next 12 months said they have no formal or documented hedging strategy in place to manage their foreign exchange risk this equates to 37,000 across the UK. This is despite companies saying that they each expect to be conducting on average around £2 million worth of foreign exchange over the same period.
James Arnold, head of FX, Investec Capital Markets said: Current market turmoil and the prospect of a global economic slowdown make it even more important that companies adopt formal foreign exchange hedging strategies as margins tighten.
The problem that many companies find is that when using forward contracts to protect their exposures they feel that if the rates were to go back in their favour they would be uncompetitive when compared to those who havent protected their exposures, he added.
*Research was conducted among 200 companies with an annual turnover of £1 million or more by Continental Research between 21st and 25th March 2008. Investec Capital Markets Foreign Exchange group offers foreign exchange (FX) payment and risk management services to firms with a FX turnover more than £1 million.