FX Risk Management & Full-on FX Treasury Services

By 
Russell Gous
Russell is a UK-based content specialist who is passionate and knowledgeable when it comes to banking, foreign exchange, payments, and Fintech as a whole. Prior to writing for MTC, he spent more than half a decade at Barclay Corporate Banking division and as a senior relationships manager at WorldFirst.
Read more about Russell Gous
Last Edited Aug 21, 2022

The better you can forecast the international liquidity requirements of your business and the currencies you anticipate to buy and sell, the better you can reduce your foreign exchange risk. Helping to prevent your business from hitting stumbling blocks later down the road which could stall your growth, or worse, cause a financial loss to your business.

Business Foreign Exchange – business payment optimization, FX risk management and currency hedging strategies – are critical aspects for businesses looking to minimise the potential negative impact on their bottom line.

With international trade on a strong upward trajectory and the recent growth in the number of eCommerce businesses being established, coupled with powerful movements in the exchange rates, the stakes are higher than ever before. Effective FX risk management will prove crucial for a growing segment of SMEs and corporations in the UK, and globally.

Best FX Treasury Management Service for Business

If what your business needs is a team of experts which will assess your companies’ foreign exchange risk, guide on whether to use hedging strategies, and suggest on the cheapest way to make payments and receive money, then the below companies should be able to satisfy your FX risk management requirements. They also offer their advisory services completely free of charge and have no fixed money transfer fees. Nor do they charge anything to set up a multi-currency bank account. If you opt to use their services, these currency brokerages are making money off purely the currency exchange.

UK Moneycorp: Highest Level of Credibility, Best Business FX Overall
Headquarters:
Zig Zag Building, 70 Victoria St, Westminster, London SW1E 6SQ
93.4% Editorial rating
7,000 Client Reviews
Minimum transfer:
£250 or equivalent
Why Them?
  • Operating Since 1970 - First Commercial FX Firm
  • Corporate FX Specialists
  • Great Online Platform, Tailored for SMEs
+Read more
UK TorFX: Friendliest Business Currency Broker in the Industry
Headquarters:
St Mary's Terrace, Penzance, Cornwall, TR18 4DZ
93.2% Editorial rating
3,500 Client Reviews
Minimum transfer:
£1,000
Why Them?
  • Personal, Friendly Service
  • High TrustPilot Rating
  • Regular Market Updates
+Read more
UK Global Reach Group: Excellent Client Feedback, Friendly & Professional
Headquarters:
Woolgate Exchange, 25 Basinghall St, London EC2V 5HA
90.6% Editorial rating
1,000 Client Reviews
Minimum transfer:
£1,000 or equivalent
Why Them?
  • 99% Positive Customer Feedback
  • Known for Great Currency Guidanc
  • Highly Usable and Friendly Website
+Read more

These fx treasury management selections have a particular focus on international payments and mitigating FX risk. They have a long track record of designing currency risk management / hedging strategies that are individually tailored to each business they work with. After all, every business will have a unique situation. The currencies they currently hold, the volatility between the currency pairs they are looking to trade and a company’s risk appetite will all influence the treasury management hedging strategy designed for them. 

In the case of Global Reach Partners, their foreign exchange treasury management platform (GRG intelligence) enables clients to manage their FX hedging in one place. It provides a comprehensive overview of your current positions, as well as an aggregated Mark to Market view across multiple counterparties, allowing you to stress and scenario test the potential impact of future periods of volatility.

Does My Business Even Need Foreign Exchange Risk Management?

Streamlining Your Accounts Via Treasury Management

Adopting the correct account structure that matches your currency flows is important. You don’t want to open new currency accounts unnecessarily (particularly with a bank as this will incur unnecessary fees) but if you have requirements to both make and receive local payments in an international currency you don’t want to be constantly converting funds back and forth with your domestic currency either. You could be losing 3-4% of your transfer each time if doing this with a bank. 

These FX companies offer multi-currency accounts that provide you with information on balances held in each individual currency and an estimation of total liquidity across all currency accounts.

FX Treasury for Small Business?!

When we think of treasury management, or specifically fx risk management, we can often think to FTSE100 or multinational corporations that have global liquidity operations. Yet, with smaller corporates becoming increasingly open to export opportunities, companies can soon find they are generating just as much revenue, if not more, in their export markets as they are in their domestic market. There’s nothing wrong with this of course, but with this in mind, having the correct treasury management services in place has become more important than ever for smaller corporates as well. Treasury management for small business is definitely a thing these days – on an absolute level, the sums involved for smaller corporates might be less than a multinational but relatively, the international exposure they face can make up just as large a percentage of total revenue.

Smaller businesses often carry out their currency risk management function on a much more localised scale. FX contracts could be stored on a local hard drive and excel spreadsheets might be used to model FX exposure. The FX companies we list on these pages have increasingly powerful online platforms that can easily allow businesses to set-up rate alerts, pull reports and schedule international transfers for up to two years in advance, in addition to handling all of a business’ international invoicing needs. Trades booked over the phone will feed into your transaction history too. With many of these companies now opening up their APIs, they are becoming increasingly easier to integrate into a company’s existing accounting and treasury management systems as well.

Building an FX Strategy

There are many internal and external factors to consider when building a foreign exchange strategy. Here we look at the different areas that currency can impact your business and how you can start to get a clearer picture of your current and expected future currency exposure.

As an international business, the chances are that you have both inflows and outflows in a number of different currencies. The ‘functional currency’ of your business is usually the currency that you trade in most and is the currency you maintain your accounting records. The US dollar has long been known as the ‘world’s reserve currency’ due to the fact it is the no.1 traded currency in the world and many countries opt to trade in USD for international and even domestic trade. We use USD as the functional currency in our case study.

When creating an FX risk management policy for an international business, there are broadly four primary areas to look at:

Each area then aligns with different stages of the currency planning process.

Case Study: A UK Multinational With Functional Currency Reporting in USD

Multinational businesses should seek to understand the net currency position of each individual currency in which they trade, each individual subsidiary they operate and then as the group as a whole. A process named ‘currency mapping’ can reveal a very different currency profile compared to traditional functional currency reporting.

We demonstrate the importance of currency mapping with this case study, in which the group trades in five currencies and the below values demonstrate the USD equivalent.

The group’s global turnover is $160 million. Traditional functional currency reporting shows a strong weighting to USD and the firm’s US subsidiary, as this is where the majority of the group’s revenue is derived – $100m.

However, the currency mapping process has revealed that all of the group’s subsidiaries face costs in USD ($50m across all subsidiaries) and that, as a result of these global costs in USD, GBP actually accounts for the majority of the group’s revenue. Thus, by looking at the global position of each currency, we can determine that a different hedging strategy is required.

By taking into account the global cost and revenue exposure, it’s also possible to identify any ‘natural hedges’ that may occur across some currencies. For example, the UK subsidiary generates EUR revenue equivalent to $10m, whilst the US subsidiary generates an EUR loss equivalent to $10m. When buying and selling EUR, this can be accounted for. The less FX trading that is required, the less a business will lose out on FX trading costs – whether that’s payment fees or in the foreign exchange margin that’s taken by the company’s FX provider.

This takes us unto the currency strategies which can be adopted in order to achieve the firm’s objectives. From a P&L perspective, the objective is generally always the same – maximise profit and reduce loss. But there are more intricate considerations in this area too – do the jurisdictions in which you operate tax FX gains/losses? Do subsidiaries have access to cash as and when it’s needed? Is there enough flexibility in your FX hedging strategy to deal with any unexpected expenses which may occur? Short term foreign currency hedging tools (such as forward contracts set to mature in under one year) can all be utilised as part of a P&L risk management strategy.

There are balance sheet considerations too – is it always best to borrow in the firm’s primary functional currency or do differences in interest rate make it more appealing to borrow in another currency? Exchange rate volatility would be a significant factor in this decision as currency movements against you could see the cost of this move outweigh any potential benefit.

Then there are strategic decisions to make for your business, which, if you’re trading internationally, will always be impacted by exchange rate movements. This fundamentally comes down to the question, how will changes in the exchange rate affect our competitiveness? And what effect will it have on our competition? If we go back to our case study, this UK multinational derives much of its revenue in GBP but faces a number of costs in USD so an increase in the value of USD may work against the firm if they’re frequently buying USD and selling GBP. Likewise an increase in the value of GBP will make the cost of goods in the US less expensive.

Lastly, it’s important to make special considerations for emerging markets. When operating in an emerging market, interest rates could be high, exchange rate volatility could be high, and, in some instances, the cost to trade these currencies in the FX market could be higher too. One common solution is to fix as much emerging market currency exposure as is possible with a forward contract. However, it’s important to remember that interest rate differentials between a currency pair will influence the forward contract exchange rate. Speak to a currency expert from a leading currency brokerage such as moneycorp to learn more about this.

In our case study, the Mexico subsidiary generates $10m equivalent in MXN but then faces $20m of costs in USD – this subsidiary will need to be funded to the tune of $10m and various decisions will be required around the source of this funding and the currency it should be sent from.

Once a multinational firm has decided on its financial reporting and strategic objectives, they have three options which can be grouped into:

  1.  Doing nothing (this is a currency strategy in itself!) but simply accepting the FX rate on any given day will make it difficult to make strategic decisions for your business and could leave you financially worse off. For example, setting prices would prove tricky as a constantly fluctuating exchange rate will impact your profit margin. Fluctuating prices is likely to make you less attractive as a trading partner.
  2.  Manage currency at a subsidiary and transaction level. One example of this could be booking each currency requirement a subsidiary has through a forward contract. Trading the firm’s functional currency (USD) into whatever currency is required at that moment, for example GBP.
  3. Manage currency at a group exposure level. If done right, this has the capability to best manage currency exposure. Maximising revenue earned within the group, avoiding unnecessary FX trading costs and trading in the FX markets when it is required and should reduce risk or bring a benefit to the firm.

FX Risk Management: Hedging Strategies

FX risk management is one of the key functions of a treasury and implementing the correct treasury management hedging strategies is vital to successfully managing FX risk. 2022 has proved one of the more volatile periods for currency in recent times. For the last decade FX volatility has actually been pretty low but high inflation is causing central banks to respond with higher interest rates and this is transferring into the currency markets. The Fed’s base rate of 2.5%, combined with USD being regarded as a safe haven in uncertain times, has seen USD either hit or nearly hit, 20 year highs against GBP, EUR and JPY.

It can be almost impossible to predict future currency movements, particularly with crises such as war, oil prices and food supply all in question.. A specialist FX broker will not tell you where exactly a currency pair is moving but they’ll be able to run you through different hedging strategies and FX solutions that can provide protection if the rate moves against you and potentially help you to benefit from upside if the rate moves in your favour. To learn more about hedging products, see our foreign currency hedging guide.

Foreign Exchange Treasury Management Solutions

Large organisations adopt some of the most advanced treasury management solutions that are available on the market today (take Kyriba as example) but for smaller corporates the story is often quite different. Firstly, they may not even have a dedicated treasury function, and if they do, they aren’t likely to have the capital to invest in expensive SaaS treasury management products. They may have accounting software in place but this can lack the necessary tools to get a full picture of their FX exposure and how currency movements could impact their business.

For this reason, smaller corporates may not be able to employ the products of pure treasury management companies such as Kyriba but may work with a number of providers that can assist them in performing many of the roles a treasury function does. The FX companies listed on this page will not only tailor a treasury management hedging strategy for you, they can assist you in opening new currency accounts and improving the visibility of your global liquidity position as well. 

Transaction Banks Reinventing Treasury Services

As corporates continue to demand solutions to enhance their corporate treasury activities, banks are increasingly partnering with fintechs and software providers to offer new products. The market opportunity is clear. A Mckinsey guide to how transaction banks are reinventing treasury services estimates that corporates spend $3.5 billion on treasury services annually.

Payments has been one of the core areas that banks and fintechs have collaborated on. SMEs can benefit from accessing new payment solutions just as much as large corporates. That’s the beauty of fintech providers, they don’t unfairly prohibit SMEs by only targeting large corporates – their solutions are designed to work for all.

Treasury Management & Operational Risk in FX

2020 was a year everything changed – processes that may have once worked in a localised office were often found left wanting when remote working became more prominent. Before the coronavirus pandemic shook the global economy, there were few businesses who had taken the time to review their operational risk management processes and be prepared for this level of remote working.

When the UK and indeed the wider world went into lockdown, treasury functions were forced to make FX payments, deal with foreign currency receipts, and manage a company’s working capital in multiple currencies, all via remote channels. This highlighted the amount of manual work involved in FX transactions – whether this be the monthly payroll run to international employees (which almost always ends up with a few manual workarounds!), internal cross-currency transfers, or large international payments to suppliers. 

The inherent risk involved in manual FX processes have been put into the spotlight over recent years – moving forward firms will see the benefit in cloud-based solutions that can automate as much of the FX payment flow as possible.

Foreign Currency Risk Management & More – Final Word

Smaller corporates may not be able to invest in the products offered by specialist treasury management companies but that’s not to say they can’t use other services to help them perform certain roles of a treasury, such as reducing currency risk. In reality, it’s simply not possible for companies to hedge 100 percent of their FX exposure and even if this was the case, it’s unlikely a firm would want to completely remove the potential for some upside gain in currency movements anyway. On top of executing a hedge, small companies can look at ways to internally remove exposures organically. This could be as simple as opening a new currency account, running balances in multiple currencies and creating a natural hedge. This is all advice a knowledgeable currency broker will be able to provide your business. FX risk management hedging strategies are just some of the tools your business can adopt – there are other opportunities to reduce FX risk across the organisation without needing to take out derivatives and incur expensive trading fees.