70 | LAST WORD | NEWS AND CURRENT AF FAIRS
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Foreign exchange expert David Johnson discusses how universities can understand the ever-fluctuating foreign exchange market, manage risks associated with transferring funds overseas and how they can ensure they can get the best value when it comes to international revenue
MORE BANG FOR YOUR BUCK
UNIVERSITIES HAVE AN increasingly international outlook. Whether institutions are receiving payments from overseas students, advertising abroad, transferring funds to cover cost of overseas research trips or foreign lecturers are sending money home to their families – all of these activities require foreign currency exchange services. But there is more to consider than simply a visit to the bank. So international has the nature of
education become, that there is barely an issue which doesn’t have a currency exchange aspect to it. And such is the
forward contracts for the whole two years and that would mitigate all exchange rate risk. This is what forward contracts were designed for. However, if the project involves selling
sterling and purchasing other currencies, you may feel the opportunity currently exists to take advantage of the rising value of the pound. The risk of a reversal in sterling’s fortunes can be controlled with a stop loss order to provide a safety net or, if funds allow for a premium to be paid, perhaps a simple option would work for you. In either case, you can set a limit on the risk of a negative exchange
rate movement whilst using market volatility to enhance your cost savings. Thankfully, I don’t think I have ever
encountered a university treasurer with gambling tendencies but some have been known to leave the conversion of currency to chance. Waiting until a bill payment is unavoidable before finalising the exchange rate is likely to mean the exchange rate achieved is less atractive than it might have been. That plan is often described as ‘we win some and lose some’ but, with judicious use of simple risk management techniques as alluded to above, losing doesn’t need to be an option.
"So international has the nature of education become, that there is barely an issue which doesn't have a currency exchange aspect to it"
complexity of some of these plans that the cost of currency transactions is almost lost in the melee, but geting the foreign exchange planning right can cut costs and make budgets go further. I know that is music to the ears of every treasurer, financial officer and department head. Thankfully, making sound foreign
exchange decisions is a lot more straightforward, a good deal more cost- effective and much less complicated than it sometimes appears. And the direction of the flow of funds is litle more than a detail in that planning. For a University planning to convert inbound research funding or sponsorship into sterling at an atractive rate is no different to planning a long-term overseas research project with all the associated costs. The key to success lies, to a large degree, in the decisions made on risk management and timing.
Currency risk management You can choose to be uterly risk- phobic and book all of your currency requirements the instant they are apparent. So the currency movements for a two-year project could all be booked on
David Johnson is founding director of foreign exchange brokers, Halo Financial
Timing Alongside Newton and Einstein, the most insightful thinker on the laws of nature was Murphy. Exchange rates fluctuate by the second and his law is the one which says that, unless you manage the risk, the exchange rate will dive just at the point where you are ready to make your transaction and that exchange rates always improve minutes after forced foreign exchange decisions brought about by last-minute payments. To mitigate ‘Murphy's Law’, you need
David Johnson
reliable insight into the foreign exchange market and trader sentiment. That will be invaluable in avoiding costly errors. With good insight comes good timing and timing is the key to exchange rate success. For example, the sterling–US dollar exchange rate has fluctuated by 11.4% in the last 12 months and the sterling–euro exchange rate by over 6%. As economies continue to emerge
from the financial crisis with varying levels of success, the volatility is likely to increase. There is no doubt a saving of this level would be welcome in all finance departments as long as the risk is managed. With just a litle forethought, that is entirely achievable. UB
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