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FX International Payments
To get a grip on your business’s foreign exchange strategy, it’s important to understand the ins and outs of exchange rates and trading tools.
At first, the world of foreign exchange can appear complex and risky. But getting a grip on it is easier than you think, and crucial if you want to keep your business ahead of the game.
To get that education started today, here’s an insider’s guide to reading currency exchange rates.
An exchange rate is the rate at which one country’s currency is exchanged for another.
The spot rate refers to the current exchange rate, while a forward rate is a contract to exchange two currencies at an agreed rate at a future date. This can be at a premium or discount to the current spot rate.
Say your business is based in Australia and you’ve agreed to purchase goods from a Japanese company with payment due in Japanese yen (JPY) 30 days from now.
Over the next 30 days, fluctuations in the spot rate mean the goods could end up costing you far more or far less than what they would cost today.
You can’t predict the future, so to protect against fluctuations you might take out a forward contract to lock in a future exchange rate for AUD to JPY. This process of protecting against future movements is called hedging.
Hedging provides certainty around future costs, allowing for better management of cash flow.
As part of a foreign exchange strategy, you may also look to trade foreign currency directly in the spot market. This might be to cover more immediate international expenses, take advantage of favourable rates or build foreign currency reserves.
Whatever the case, there are a number of tools available to minimise the risk you face in this type of trading.
Limit orders are used to buy or sell an amount of foreign currency at a specified exchange rate. In the event the currency is trading at this ‘limit’, the order will be executed.
A stop loss protects the value of your holding by establishing a low water mark, which represents the maximum you’re prepared to lose on the trade. If the value of your holding declines below this low mark, your holding is liquidated to ensure losses don’t increase.
An OCO order is a combination of a limit order and a stop loss, with the added condition that if one of these orders is triggered, the other is cancelled.
For example, an OCO could be used to set an upper limit order and lower stop loss at which your holding is to be sold. If one is triggered, the other is cancelled, which means your currency holding is free to trade within this pre-set range.
So those are the key terms and tools you need to know. The next step is to involve an expert foreign exchange partner - one that helps make sense of the market and guides your business in reducing currency risk and maximising returns.
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The information contained in this webpage has been prepared without taking into account your objectives, financial situation or needs. You should read the PDS and consider the appropriateness of International Payments in relation to your individual requirements.
For further information, please refer to the relevant (Telegraphic Transfers and Forward Exchange Contracts) Product Disclosure Statement (PDS).
Centurion Finance Limited has, under Part 3 of the Financial Markets Conduct Act 2013, lodged a replacement Product Disclosure Statement for Forward Exchange Contracts with the Companies Office on 21/07/2017. A copy of the PDS may be obtained here or on request and free of charge by phoning Centurion Finance Limited on 0800 472 353.
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International Payments are arranged through International Payments are arranged through Centurion Finance Limited. Principle Place of Business in New Zealand Jarden House, Level 5, 21 Queen Street, Auckland, 1010, New Zealand.
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