Dangers of On-Line FX Trading
What does this mean?
Surely having an on-line platform to trade you currencies, book forward rates and options has to be a good thing, doesn’t it?
Not necessarily the case and it can often generate more problems than it does provide solutions.
On-Line FX Trading – Point One
Most of these systems are provided by banks to enable their clients to trade currencies more easily. It enables a hassle free trading process. All good.
So let’s look at the risk here.
Is what you are doing actually the best thing for you?
Take away the risk of pressing the wrong button, adding the odd ‘zero’ here and there, or getting your trade the wrong way round (yes they are all very common events!) then we get into the detail of why these platforms can be risky.
Take a simple forward contract. You book a forward contract to sell US Dollars as you have an invoice due to be paid in US Dollars and need sterling for the payroll. You book the forward contract on-line, happy days.
But what happens if the client fails to pay? You are committed to the trade.
This is where on-line FX trading falls down. Had you done this with an FX specialist then that forward contract could be arranged to be drawn in tranches, over a period of time, or rolled onwards. Therefore your risk is much better accounted for. All things an on-line systems cannot offer you.
On-Line FX Trading – Point Two
Let’s get back to basics of cost. Take this scenario;
You have money coming in from an invoice raised in Euro. You need to pay a supplier in the US and several creditors in the UK. So, using your on-line system you have booked your forward contract or option. FX risk covered. The money comes in on time and it all works to plan.
But what have you actually done? Think through the transactions, it will go something like this;
- Euros received in to UK based Euro account
- Send Euros out to complete forward contract
- Receive sterling into your bank account
- Make payments to your suppliers in the UK
- Make payment to your supplier in the US
All in all that’s 7/8 different transactions, all of which you will be charged for, need to administer and make sure happen. Costs are adding up, especially if you do this several times a month.
Now take a different approach. By getting the right FX solution in place you could do the following;
- Euros received in and paid to FX provider
- FX provider make your payments out
No protracted series of transactions, no cumulative bank costs, no need to authorise or make loads of payments.
Suddenly life is much simpler.
The On-Line FX Problem
In summary, you can solve the easy bit without actually putting in the best solution for you. Getting good FX advice is usually cost free, the benefit of doing things that suit your business is cash positive.
On-Line systems are great but they don’t give you the best solution and often only provide part of the answer. They actually prevent you from doing the best thing for your business.
If you have any queries about this article then please contact us on 01293 541333, or use the website here.
By Lime Consultancy