In an increasingly global and mobile society, many people have investments across the world and receive income from abroad. These transactions are all subject to the risk inherent in currency assets due to fluctuations in the foreign exchange market. The FX market fluctuates for a variety of reasons; economic statistics, political events and investor sentiment have a huge impact on the real value of your underlying asset or income. Positive domestic economic statistics, for example, would be likely to cause a currency to strengthen against key counterparts in the short term.
Currency values fluctuate constantly; this can make it very difficult to predict when the best time to exchange your currency may be to protect your assets. A sudden drop in the value of sterling could mean that sending funds overseas becomes more expensive than anticipated. Even a slight difference or a fraction of a percentage point can have a significant impact on your currency costs. A sudden rise in the value of the pound could devalue any income from overseas, and if sterling weakens, this could decrease the value of a currency transfer.
The reverse is also true; there is an opportunity to make the most of your money, but given the volatile and unpredictable nature of the currency market, it’s a risk to leave such matters to chance. Understanding the impact of currency market fluctuations on your funds and the inherent risk of sending or receiving international payments is the first step to hedging against significant losses.
The expert guidance of a currency specialist includes both market insight and access to specialist tools which could help you make the most of your money overseas.
Overseas shares and currency risk
If you are in receipt of dividends from shares in companies based overseas, you are likely to receive the dividend yield in the currency of the country where that company is based. A diverse portfolio may include shares in companies across the world, which means multiple dividends in multiple currencies. In general, it is possible to calculate a stock’s dividend yield by dividing the annual dividend by the stock’s price. However, if the yield is paid in currency, then you may need to additionally calculate the value of that yield in sterling.
To do this, you can search for the current exchange rate, or even take an average based on recent trends to make an estimate. However, you cannot predict the exchange rate at the moment that the dividend is paid, or on the date you choose to exchange it. Dividends are paid on a fixed schedule; the payment date – or dates for quarterly dividends – are announced on the declaration date. If you have made private equity investments, you may have a different schedule for receiving any dividends from the receiving limited company, but these are still subject to the same currency risks and costs as any other international income.
Once the declaration of a company has been made, unless you have opted for a dividend reinvestment plan, you will know both the amount you are due to receive and the date that you will receive it. This means that while you can’t know the exchange rate at this point in the future, you can use currency tools to manage that transaction and protect against sudden changes in the exchange rate. Venture capital investments often operate on a longer-term schedule than the annual or quarterly payments of more established companies. The retention ratio of companies in receipt of VC funds can be higher to fund organisational growth, which means it’s likely to be a longer term investment. While this can be a strategy that has significant returns in the long run, it makes it even harder to predict any currency income because of the volatile nature of the FX market and the constant changes in currency values. Being aware of the range of hedging strategies relating to currency risk as well as the tools to manage currency payments can form part of a VC investment strategy that allows you to mitigate the risk of currency costs on overseas investments.
Working with a currency expert gives you access to knowledge that could help you decide on when you want to make an international payment, a service which is often overlooked by traditional banks as they don’t specialise in foreign exchange.