When is it time to take cover? | Fin24
  • Covid-19 Money Hub

    The hub will help answer your business and money questions during the coronavirus crisis.

  • Dudu Myeni

    The former SAA chair has been declared a delinquent director for her role at the national airline.

  • Cigarette Ban

    Govt says emerging research shows smoking leads to more severe cases of Covid-19.


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.



Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Company Snapshot

Voting Booth

How has Covid-19 impacted your financial position?

Previous results · Suggest a vote