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How much education does an exporter need to execute these strategies?
IC: “Not much, because you start at a basic level; it’s like managing your own bank account. We’d assess how financially sophisticated we think the client is: for the less sophisticated, we’d show them more vanilla strategies; if they’re more sophisticated we’d show them more complicated strategies. As we get to know the customer more and they become more sophisticated in terms of financial instruments, we can show them other strategies. It comes down to making sure the client understands what they’re doing and don’t take risks they shouldn’t be taking.”
AS: “Traditionally we’d use a trade transaction profile or cash management questionnaire to understand where they are now and where they expect to be, so we’ve made them think through their likely currency requirement before involving the specialists from treasury.”
Do the exporter’s credit facilities affect the type of currency option they should take?
AS: “We have some ‘over the counter’ style customers who might process US dollar receivables under letters of credit from Vietnam, for example. We can actually discount those documents in US dollars so we effectively have a currency match.
“We can do debtor financing in foreign currency, so we have a range of credit facilities that can be in multi-currency if it’s appropriate. The availability of debtor financing in multi-currency is probably not well known: a lot of people would traditionally convert to Australian dollars and just finance in Australian dollars.
“You’ll typically find that traders, or people with skinny margins, would lock in forward cover to maintain their profit margins. It’s customers with larger gross profit margins who can afford to play around and carry a bit more risk.”
How can a currency strategy help maintain consistent margins?
IC: “The secret is making sure your actual contract negotiations with the buyer are locked away at the right US dollar price. The coal exporters are a classic example: they negotiate out for a year both on a volume and price basis in US dollars. They then do the currency hedging because they know what their volumes and sale price are going to be.”
AS: “It’s very much part of understanding your product and your comparative advantage in the market so you know what margin you can sell your product for, and repricing that if the market moves against you. It’s ensuring you keep track of fluctuations and repricing for your next sales contract to avoid losing your profit margin.
“It also depends on cost base which is why we look at both sides: a lot of our clients may not have all their costs in Australian dollars, for example. They may be selling into a US dollar market and they may have costs in US dollars, so we can refinance some of their imports in US dollars to match up and have a natural hedge and just take out cover for the unmatched portion.”
Do the strategies differ for currencies other than US dollars?
IC: “It doesn’t matter what currency your contract is in, you can still hedge that currency risk out by approaching a bank and trying to predict as accurately as you can the maturity date of your contract. Once you have a maturity date and a notional amount of your contract, that currency risk goes away to the extent that you’re accurate in your forecast from the beginning. The level of accuracy you need around that is reduced somewhat by having a foreign currency account they can pay into and take out of.
“You might enter into a contract with someone in Vietnam who wanted to buy your goods. It would be atypical, but that company may decide they want to pay in local currency. We can provide that sort of hedging in local currency. Some markets are non-deliverable forward markets, which means you net settle the contract rather than have a physical payment in the foreign currency or receipt in foreign currency at maturity of the hedging contract. The physical payment would be converted onshore subject to the country’s exchange controls.
“The main currency that exporters would deal in, however, is US dollars, unless you’re exporting to Europe, then it’s the euro and so forth. We recommend that exporters denominate their contracts in whatever the best currency is for them to get the widest margin. They can then hedge out that currency risk as mentioned previously. Theoretically, an exporter should be able to sell and get the best profit margin by selling in the most liquid currencies, but that’s not always the case. It really does rely on accuracy of forecasting as much as anything.”
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