Purchase of Goods from China
ABC Ltd. purchases furniture from China with US dollars and uses Currency UK for its foreign exchange requirements. XYZ Ltd. also purchases furniture from China in US dollars but buys them from its bank.
In April 2005, both companies agree contracts by which they buy $25,000 of furniture each month for the next 10 months. Both companies can afford to buy all the currency on this date, however only ABC Ltd. choose to do so at a rate of 1.9050 As they have no US dollar account they choose to leave the money on account with Currency UK. As they have already costed everything at a rate of 1.8500 they are already making a profit of £3,901.54 simply on the foreign exchange.
As the months go on, the US dollar continues to strengthen against sterling, XYZ Ltd. has no protection against this and continues to buy its US dollars from its bank at a spot rate. ABC Ltd. enjoys a constant rate of 1.9050, For XYZ Ltd. it all becomes more and more expensive. The dollar continues to strengthen as follows:
1.8900 in April
1.8700 in May
1.7925 in June
1.7250 in July
1.7700 in August
1.8300 in September
1.7300 in October
1.7050 in November
1.7600 in December
1.7720 in January
ABC Ltd. has paid a total of £131, 233.60 for their furniture and is able to be more competitive than XYZ Ltd. the latter having paid £140,248.23 for the same furniture - a difference of £9,014.63.
Recruitment Consultancy
A recruitment consultancy recently placed a candidate in a job in Switzerland, and was required to invoice their client in Swiss francs (CHF). The fee invoiced for the placement was CHF 25,000 and the consultancy was due to receive this fee within 90 days.
The client in Switzerland could have transferred the CHF directly into their sterling account here in the UK. However this would have not only left them exposed to any downturn in the rate during the ninety day period, but would also have left them at the mercy of the bank who would have exchanged the CHF at a rate of their choosing. The consultancy decided to take advantage of the services offered by Currency UK and booked a forward contract. They instructed their client in Switzerland to transfer the CHF directly to Currency UK’s Swiss franc account.
On 16 March 2005 they sold CHF 25,000 to Currency UK at a forward rate of 2.2200. The consultancy knew at this point they would receive £11,261.26 and could rest safe in the knowledge that they had no risk from currency fluctuations.
On 24 June Currency UK received the CHF 25,000 and advised them on receipt. The sum of £11,261.26 was transferred to the consultancy’s UK bank account that day. Now, the spot rate offered on the day was 2.3400. Simply by booking this forward contract the consultancy saved themselves £577.56.
In reality the consultancy saved considerably more than the above, as they would not have received as competitive a rate from their bank, nor would they have been able to fix this rate prior to receipt of funds. Over the course of the year, the recruitment consultancy was able to use Currency UK to make profits on all its foreign placements and correctly forecast the cash flow from these placements.
