The cross-border pharmaceuticals trade is a competitive field and many import companies in the UK are operating on tight margins. Currency hedging can help you protect against the level of foreign exchange (FX) exposure built into this type of import business model. Without hedging, the slightest fluctuation in an exchange rate can eradicate the margin you've worked hard to build.
UK import companies operating in the healthcare sector deal with a variety of different currencies as part of their day-to-day operations. They will typically buy inventory from one of the giant global pharmaceutical companies - such as Pfizer (based in the US), Roche (Switzerland), and Sanofi (France), for example - and then sell this on to the NHS, which spends around £27bn on goods and services annually1.
For companies bringing product into the UK, one method of currency hedging is to use forward contracts. They offer import companies a way to lock in an FX rate for a foreign transaction. A forward contract is struck between two businesses to buy or sell a specified amount of a currency at an agreed rate of exchange at a future date. This provides certainty about the cost of the transaction and ensures that the UK importer has all the information it requires to keep its margin.
For example, say a UK-based drugs reseller wanted to buy the new cancer treatment Zirabev from Pfizer in the US. Use of a forward contract in this transaction can guarantee peace of mind for the UK company about the exact £/$ rate that they are paying for the pharmaceutical inventory, while the US business knows it will be receiving prompt payment within the agreed length of the contract.
Types of forwards
Fixed forwards and window forwards are two ways businesses can hedge currency to avoid risk. With fixed forward contracts, businesses can lock in FX rates and make prompt payment to their suppliers, reducing FX risk related to the purchase. Fixed forwards can be useful if you know exactly when you will need to make a payment. They can be also be used to sell currency at an agreed point in time in the future.
Window forward contracts can be popular due to their flexible nature. A window forward lets you buy or sell foreign currency priced from today’s exchange rate for delivery on or before a specific date in the future. Window forward transactions typically offer a slightly worse rate than fixed forwards, but they allow you to make several payments, as long as the whole amount is delivered by the settlement date. They can be particularly popular if your business plans on making multiple payments over a certain period of time.
Future dated forwards are another option and strike a balance between standard window forwards and fixed forwards. Depending on the currency, future dated forwards let you lock in a beneficial FX rate for the future - like a fixed forward - but you can buy or sell currency over a period of time, as you would with a window forward.
By hedging currency with a forward contract, UK companies with overseas suppliers can successfully protect their margin from currency fluctuations.