Financial security and the global competitiveness of UK technology companies are vulnerable to currency swings. In February 2022, the British pound had a significant fall of 12.5 percent against the US dollar, causing a setback in every market sector, including tech companies. This unarguably shows that the strength or weakness of the US dollar (USD) can significantly influence the profitability of these companies since it is a widely used currency for international transactions.
Therefore, adopting innovative currency risk management strategies is essential to mitigate the adverse effects of USD fluctuations. This piece explains three creative strategies UK IT companies can use to manage currency risk efficiently.
Hedging With Financial Instruments
One approach to mitigating USD volatility is using financial instruments such as forward contracts or options. A software company anticipating receiving USD payment could sell USD at a prearranged exchange rate by entering into a forward contract. A forward contract allows the parties involved to buy or sell any currency at a preset future date and exchange rate. This guarantees a constant sum of British pounds, mitigating exposure to fluctuations in the pound’s value.
For instance, let’s say that 1 GBP equals 100 USD (GBP/USD), and you have investments in US software, which exposes you to the USD currency. However, you intend to convert the USD back to GBP. As an investor, you can enter into an 8-month forward contract, allowing you to convert your funds to GBP at a pre-determined exchange rate after the specified period.
By doing so, they can protect themselves against adverse currency movements influenced by the US Dollar index. The US Dollar Index measures how strong the dollar is compared to a group of six other major currencies. Taking consideration of the US dollar index will help you safeguard your profitability.
In addition, options give businesses more leeway by allowing them to buy or sell a specific quantity of currency at a predetermined exchange rate within a predetermined time frame without incurring any corresponding obligations. This can be a boon in times of instability or when large swings in exchange rates are possible. However, hedging cannot eliminate all your risk.
Diversifying Revenue Streams
UK tech companies may be exposed to currency risk if they rely primarily on revenue generated in US dollars. These businesses can lessen their reliance on the US dollar by entering new markets and earning revenue in other currencies, such as the euro or the Japanese yen. GlobalData analysis shows that 50% of Shenzhen Everwin Precision Technology Co. Ltd’s earnings come from diverse countries apart from China, and this large percentage is a major part of their global earnings. Successful revenue diversification will safeguard and help businesses grow tremendously in sales and revenue.
To achieve this, UK tech firms can explore opportunities in emerging markets and leverage their technological expertise to meet the specific demands of those regions. Businesses can reduce their reliance on consistent US dollar earnings by focusing on expanding into markets where local currencies are stable or strengthening. Joint ventures and strategic alliances with regional businesses can open up untapped sales channels and assist in broadening an enterprise’s potential customer base.
Implementing Technology-driven Solutions
Accurate predictions of currency fluctuations can be made using machine learning algorithms and AI. Companies can benefit from these cutting-edge technologies because they provide insights into currency risk management by analysing news sentiment, market indicators, and historical data.
Additionally, blockchain technology presents opportunities for addressing the problems of high transaction costs and a lack of transparency in international monetary transfers. By eliminating the need for intermediaries and the risks associated with currency volatility, blockchain-based systems might facilitate smoother international transactions.
Forbes Council Member and CEO of Fama Cash Saiful Khandaker says that Blockchain can fix inefficiencies and offer an option to the new system that is faster, inexpensive, and safer. Automating currency hedging through smart contracts on blockchain networks can increase productivity and reduce the potential for human mistakes.
For UK tech companies to successfully face the problems created by USD swings, currency risk management is paramount. These companies can lessen the impact of currency fluctuations by using novel approaches like hedging with financial instruments, diversifying income streams, and implementing technology-driven solutions.