The foreign exchange markets are a tough playground at the moment, especially if you are importing goods into Australia. The Australian Dollar has depreciated against the US Dollar significantly since mid-2008, however this depreciation is only part of the picture.
Throughout this fall we have experienced extreme volatility. It's hard enough to cope with your costing levels being hard hit, but how do you cost with any confidence going forward?
Many importers cover their upcoming import payments by using "Forward Exchange Contracts" (FEC) or "Forwards". A Forward Exchange Contract simply fixes an exchange rate for you to use at a particular point in the future.
This achieves two things: firstly, you will guard against any further fall in the Australian Dollar. Secondly, and significantly, you know in advance what you will have to pay for your imports. Cash flow certainty in this environment is great news for you and your business.
Like any financial markets product, it pays to check out whether an FEC suits your business. You should always read an FX provider's Product Disclosure Statement (PDS), or seek independent financial advice.
By fixing your exchange rate you protect your business against a falling currency, but should the currency rise, remember that you are locked into a contract. If locking in cash flows and profit margin are a part of your business plan, then an FEC may be able to help.
Forward Exchange Contracts also offer flexibility. You are able to use all or part of your contract early, or extend the maturity date in need.
Some foreign exchange providers will ask for a security deposit prior to establishing an FEC. It can pay to shop around for a provider who won't. You don't want to unnecessarily tie up your capital.
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