Corporate Foreign Exchange - Find The Right Solution

Updated: May 16


Corporate currency exchange can have a drastic impact on your bottom line. Whether you send money to suppliers or receive currency, you must have the right solution in place. In a confusing and sometimes complicated industry, we break down how pricing works, products available and more in this article.


Let’s jump in:


Currency with a pie chart on a table

What is Corporate Foreign Exchange?


Corporate foreign exchange is where organisations move money from one currency to another. Whether sending international payments or receiving funds. Conventionally used for importing and exporting, businesses conduct money transfers through banks or third party providers.


Organisations use varying forms of corporate services, with online services, direct to dealer and FX relationship managers all on offer. Enhanced financial products not available to consumers are provided through currency businesses and banks to help mitigate the risk of volatile trading in markets.


Whilst it used to be the case that high street banks controlled the market, new third party and financial services providers are entering the realm to compete on both pricing and service. Vastly becoming popular due to the high fees banks charge for SME customers.



Different currency on a table with the text 'business currency exchange products'


Business Currency Exchange Products


Corporate clients conduct a higher volume of currency than the consumer. This grants you access to more financial products. With some more complicated than others, let’s break them down below:


Spot Market


The spot market is the most used form of currency exchange product. Although classed as a 3-day settlement now, most providers are on the same day for major currencies. Varying timeframes can apply with exotic currencies due to banking restrictions.


Currency Forward Contracts


With forward contracts, you secure an exchange rate ahead of time (up to 2 years). This is for a certain amount of currency and at the given rate on the day of booking. Organisations use this for risk management and locking in costings on contracts.


The widely used hedging solution is available to certain businesses with no deposit, although some will require a deposit of 5%-10% of the contract value. Helping to currency risk between currency pairs can be secured on imports or exports.


Side note: Always read the terms and conditions of currency forward as margin calls terms and conditions lay within. If the rate drops by a certain percentage, you will have to pay more collateral to keep the position open.


FX Options


Options are exchange rate insurance contracts. They cost a premium to place, which is derived from the intrinsic value and the time value. Inherently more complicated than conventional forward contracts, only larger corporations normally use them.


You place a contract at a certain price and depending on the movement once that contract expires you could be in or out of profit. Pricing is determined by currency pair volatility, strike rate and length of the contract.


With different forms of options available on the market, it's hard to convey precisely how they work but if you would like more information, get in touch.



Wooden tiles spelling price


Corporate Foreign Exchange Pricing


Now we delve into the realms of pricing. We will break down exactly how exchange brokers and bankers alike formulate their pricing, so you know how the market works.


Banks


Banks trade with each other at interbank prices. This is the exchange rate you’ll see on XE and other live feeds. They get this exchange rate due to the large volumes they transact.


When it comes to selling to a business, they add a margin on top of their buy exchange rate. Like any wholesale business, they buy at one price and sell at another to create profit.


Conventionally banks normally charge higher prices than 3rd parties. This is because they have a captured market. This is not true though for large corporations who are transacting enough to get banks interested in their business. People trust banks (to a point) and believe they will be looked after.


Don’t be fooled by the £5-£15 fee you are charged. This is only used to mask their profit from the exchange rate difference between their buy and sell price.


3rd Party Providers


When the banks controlled the market, entrepreneurs saw opportunities to step in. Building foreign exchange companies that buy in large volume but cut the margin taken by big banks. Ironically enough they buy directly from their competitors. This doesn't bother banks as they would rather deal with one large customer instead of thousands of small ones.


Due to the number of companies in the space, pricing has been driven down. Price wars between brokers make a great market for businesses looking to transact.


The Best Corporate Foreign Exchange Solution


The best currency solutions are out there but it takes some searching and industry know-how. Likewise, it depends on your company's circumstance, volume and products needed. Here at Funding Routes, we help you source the right solution. We find the right solution for you with a team of industry experts at no fee.


Get in touch with one of our team here today.


2 views0 comments
fundingroutes_edited.png