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When is it time to take cover?

Aug 21 2012 16:35
This is a Bidvest Bank promotional feature

When should a business take forward cover on foreign currency transactions? A little over a decade ago the answer was easy ... almost always!

In those days, the rand was a one-way bet, softening constantly until it collapsed to more than R13.80/$. Since then, we have seen the rand rebound, only to weaken and strengthen again.

Such swings make hard-and-fast pronouncements on forward cover impossible. However, South African importers have long memories and tend, on balance, to buy forward cover.

The practice involves a commitment to buy foreign currency at a specific time for a specified rate. For example, if the rand is trading at, say, R8.25 forward cover three months out, R8.40 might be agreed between a client and the currency provider.

Cover like this is a contract and has to be honoured.

In recent years, some importers have backed their own view on the rand and have bought their foreign currency as necessary without forward cover.

Those involved in regular transactions month after month may take a win-some, lose-some approach, knowing they may gain with one transaction but might lose with the next.

Those under margin pressure in competitive markets might decide to take forward cover as a significant fall in the rand’s value could totally erode their margin.

Others may use derivative instruments to hedge currency risk.

Some importers use a simple 50/50 strategy, buying forward cover on half the value of a transaction while leaving the rest uncovered.

Whatever the approach, it pays to stay abreast of currency market movements and factors affecting rand performance.

A specialist like Bidvest Bank provides constant information flows like this and will provide forward cover, or not, depending on client preference.



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