Reply to: Currency risk

[ASB]

Thanks for the views. I will give it a go, but I want to consider other options as well. One good thing is that nothing will be signed in advance of the referendum.

You have the keyword in there. Buy appropriately dated options would be one way. And a perfectly normal way of hedging.

[Old Greg]

Wooot!

I thank you. Just need to actually sell them something now...

[northernladuk]

Conversation with one of two potential first clients. They would be content to bear the currency risk themselves

Wooot!

[Old Greg]

Conversation with one of two potential first clients. They would be content to bear the currency risk themselves

[Old Greg]

Definitely a risk. If you're moving out of contracting, a traditional Ltd would be possible in Ireland too, I suppose, but it depends how they distinguish between a contracting vehicle and a traditional trading vehicle. But now you're into the big bad world of proper trading, not the poncy, soft, world of contracting . That involves things like convincing banks to loan money to your business. Better to play with their money than yours, but you'll need a convincing business model

It will all have to be bootstrapped, but the trick will be to keep costs to a minimum, build up slowly and manage cash flow / credit risk. Getting cash out of an Irish bank is like getting a drink out of MF without sticking two fingers down his throat.

As an aside, I use a traditional Ltd for contracting in Ireland anyway - there is just no tax advantage.

[jamesbrown]

When I closed down my Ltd in UK, I did a capital distribution. In Ireland there is no tax advantage to retaining funds in the company if contracting so the war chest is in a personal account now. I'll need to do a Director's Loan to give working capital and I definitely don't want to lose that now I've been to the trouble of extracting the funds.

Definitely a risk. If you're moving out of contracting, a traditional Ltd would be possible in Ireland too, I suppose, but it depends how they distinguish between a contracting vehicle and a traditional trading vehicle. But now you're into the big bad world of proper trading, not the poncy, soft, world of contracting . That involves things like convincing banks to loan money to your business. Better to play with their money than yours, but you'll need a convincing business model

[Old Greg]

Nice Yes, it definitely works both ways. 2014 was a bad year for me with currency swings, but it's been very good since then. Swings and roundabouts. If you do begin to scale-up, and the risks start to become substantial, it may be worth looking into financial products, although you always have limited liability as a worst case scenario.

When I closed down my Ltd in UK, I did a capital distribution. In Ireland there is no tax advantage to retaining funds in the company if contracting so the war chest is in a personal account now. I'll need to do a Director's Loan to give working capital and I definitely don't want to lose that now I've been to the trouble of extracting the funds.

[jamesbrown]

I can only do the best I can do with price. I am looking to build a "proper" business which is an expansion of my contracting, and there is always an element of risk. As long as I can manage the risk of being locked into a contract where I lose money, then that's OK. I shouldn't grumble too much. Sold the house in the UK in September and transferred to EUR in 5 tranches at an average of 1.41 with 0.5% commission.

Nice Yes, it definitely works both ways. 2014 was a bad year for me with currency swings, but it's been very good since then. Swings and roundabouts. If you do begin to scale-up, and the risks start to become substantial, it may be worth looking into financial products, although you always have limited liability as a worst case scenario.

[Old Greg]

That's what I'd do. Keep it simple. If you factor in a decent margin for currency swings, you should be able to find a decent compromise between renegotiating as needed and avoiding terminations wherever possible (not good for business). Clearly, this only applies outside of major risk events, such as the EU Ref, or in the event of Brexit, for an extended period afterwards. The other risk with EUR/GBP, in particular, is that we're in very strange times with the ECB and BoE, where slight changes in (relative) monetary policy can result in major changes in currency pairs. In other words, I'd factor in a very healthy margin.

I can only do the best I can do with price. I am looking to build a "proper" business which is an expansion of my contracting, and there is always an element of risk. As long as I can manage the risk of being locked into a contract where I lose money, then that's OK. I shouldn't grumble too much. Sold the house in the UK in September and transferred to EUR in 5 tranches at an average of 1.41 with 0.5% commission.

[jamesbrown]

All very interesting, thanks.

I think going for a financial product sounds complex. The sums aren't massive but I don't want to make a loss. I may put €50k in a GBP account at the start of the contract and then make sure I have a 1 month notice clause so I have an emergency brake / opportunity for renegotiation if the worst happens.

Anyway, need to win the business first...

That's what I'd do. Keep it simple. If you factor in a decent margin for currency swings, you should be able to find a decent compromise between renegotiating as needed and avoiding terminations wherever possible (not good for business). Clearly, this only applies outside of major risk events, such as the EU Ref, or in the event of Brexit, for an extended period afterwards. The other risk with EUR/GBP, in particular, is that we're in very strange times with the ECB and BoE, where slight changes in (relative) monetary policy can result in major changes in currency pairs. In other words, I'd factor in a very healthy margin.

[Old Greg]

All very interesting, thanks.

I think going for a financial product sounds complex. The sums aren't massive but I don't want to make a loss. I may put €50k in a GBP account at the start of the contract and then make sure I have a 1 month notice clause so I have an emergency brake / opportunity for renegotiation if the worst happens.

Anyway, need to win the business first...

[elpato]

I have seen clauses in contracts before stating that any variance of +/- x% in the exchange rate will result in some portion of the cost being passed on.

Caveats being a) that isn't the exact wording and b) this was an interfirm agreement between two different arms of a Big 4 in different countries

[jamesbrown]

Broadly speaking, yes. Whether it's a sensible risk to manage is another question entirely, given that currency fluctuations over a multi-month contract could far exceed any margin you might have. Also, you're exposing yourself to a complicated risk in that a futures contract (an agreement to buy or sell in future at a rate agreed today) exposes you to a liability that may be unwanted at that future date if a contract is cancelled. Large companies deal with these issues all the time, but they can afford to do so, and it often hurts their bottom line (or greatly improves it). I think you'd essentially want an fx option; that is an option to buy currency in future at a rate agreed today, but not a commitment to do so. You would then factor the cost of that option into your margin.

Bottom line, you'll need to talk through your options with a broker. I wouldn't speak to a highstreet bank though. Try one of the fx brokers like Oanda or HiFX. Choose one that has been around a long time and has a good reputation. There is nothing like the FSCS in this industry. You'll need to place a deposit, which may itself increase as rates change, and that deposit may be at risk. Brokers do go bust (e.g. SNB fiasco when they scrapped the Euro ceiling).

Personally, I probably wouldn't do this in your position. If I work internationally as a contractor, I bill in the local currency and factor this risk into the prices I charge. It's better for you to spread the risk to contractors. Also, if these are relatively short contracts, you can recalibrate regularly, but it may leave your prices uncompetitive in the local market.

[eek]

You may not have the cashflow for this and the circumstances are slightly different as the events were one off rather than ongoing but I had a mate years ago who used to book and promote American blues acts for gigs in the UK and he would buy his dollars (to pay the acts) on the day the deals and contracts were confirmed. Sometimes he won from doing that and sometimes he lost, although I would guess you're not enough of a 'playa' to do that with long term contracts.

A lot of those providers went belly up in 2011. A lot of others closed once they discovered the true level of risk involved.

[diseasex]

What you can do is to hedge risk by buying options on currency for a small fee at the time of entering contract with them. I won't go into detail , but you can do this on interactive brokers platform