Cost Averaging, a currency strategy for business international payments.

What is cost averaging?

Many companies prefer to use a cost averaging strategy, where they hedge a percentage of their future currency exposure with a forward contract and leave the remaining percentage open to take advantage of potentially favourable market movements with spot contracts (a simple one off money transfer).

How cost averaging can help your business?

This provides protection against some exposure to any adverse market conditions against the business, while still allowing for upside potential.

How cost averaging works?

For example, you know that you’ll be paying supplier invoices to the value of US$500,000 over the next year.  Due to volatility in the foreign exchange market you also know that the rate will go up and down quite a lot over this period, so for security you lock in 50% of your future currency exposure ($250,000) at today’s rate with a forward contract.  It means that – with you still needing to send a further $250k over the next year – you can continue to take advantage of any potential rise in the value of GBP/USD over the next twelve months with spot rates.

Depending on your risk profile, you can of course vary the degree to which you book spot and forward rates.

Get a Quote

If you would like to talk about a cost averaging strategy and get a quote for a forward exchange rate, please call one of our corporate dealers.

 

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