With more and more overseas talent on the payroll, complex international transfers, and global supply bases, sports businesses commit to future FX transactions almost every time they strike business deals. But do they spend enough time thinking about how much they could lose if currencies move against them?
No-one can reliably predict future exchange rates, so it pays to get your business some protection against adverse movements. The amounts that it can save you can be very substantial!
At least $4 trillion is traded on the foreign exchange markets every day, making the foreign exchange market a very volatile and daunting place to do business. Given this, it always surprises me that, even when organisations have a large foreign exchange requirement, it is one of the last things to be considered in a long list of priorities!
We work with a number of well-known teams and clubs within the sports world. We don’t just help them achieve superior exchange rates – but more importantly we help them implement FX risk management strategies that offer protection against adverse movements.
Let’s take an example from football;
You’re a UK-based football club and you are buying a player from within the Eurozone at a bargain price of 10 million Euros. To make it simple, let’s assume that the deal has been structured so you pay 50 percent now and 50 percent in twelve months time. We will also assume that the deal was negotiated and done in January 2011 when the rate to purchase Euros was 1.1950, so 10 million Euros would have cost £8,368,200. Fifty percent was due so you have only paid £4,184,100. Now we are in late-October and you are planning to pay the remaining balance. But now the rate is 1.13! So the cost of the remaining 50 percent is now £4,424,778; an increase of more than £240K! What else could you have done with that money? How much effort would your commercial director have to have made to get a sponsorship deal worth £240,000?
RationalFX’s risk management team could have saved you all – if not more – than £240,000 in the above example. We would have suggested that you fix the exchange rate for the remaining balance at the time of the deal – to give you a clear idea of what 10 million Euros was going to cost from the offset. And if you were more inclined to take risk, we would at least have placed Stop Losses in the market, which would have ensured that you didn’t pay over a certain amount even if the market moved against you.
Another example could be from the world of Formula One; another area where we have worked with some of the top teams. Many F1 businesses operate with a lot of revenues and costs in both US Dollars and UK Sterling – and they move money between their accounts depending on the balance of income and expenditure.
With sponsorship stage payments normally predictable they can lock into an exchange rate for an entire season and make their income predictable in more than one currency. This can make the job of budgeting and financial management a whole lot easier when compared to a situation where the month’s income depends on whether the market likes or hates the latest speech from a Central Banker! Or the decisions of the Greek Government!
In FX, timing is everything; the recent sharp plunge in the value of the Euro is a great illustration of the impact of timing. Many businesses assume currencies will rise and fall – and that if currencies have move against them then they will have the opportunity again to buy currency at the peaks – or troughs.
The reality is that time and time again businesses don’t take an objective view regarding timing and are often forced by circumstances to make purchases at the worst possible times. Waiting for a currency to move in your favour while delaying foreign currency payments can result in the complete opposite effect to what you hope for – you buy late, and at the wrong price.
Talking to an FX specialist like RationalFX is not just about getting bank-beating exchange rates, it’s about getting ahead and above the currency markets and trying to remove the negative impact that adverse currency movements can have on your business.
Do I know what could happen to the Euro if Greece default on its debts and it starts a domino-effect of countries withdrawing (voluntarily or otherwise) from the Euro? And what about the future cost of payments to be made in “New Drachma” or “New Lira”? No, of course not! But I do know sports businesses should be planning ahead with a view to minimising their exposure – particularly at such a potentially historical point in the future of some key exchange rates and, indeed, whole currencies!
Rajesh Agrawal is the Founder Chairman and CEO of RationalFX, a company he founded in 2005 that specialises in foreign exchange strategy. Agrawal is a fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce and an official Think Tank Member of the World Entrepreneurship Forum. Under Argawal, RationalFX became the first UK-based company to launch an online currency exchange system for private individuals on real-time prices. In August 2011 RationalFX signed a shirt sponsorship deal with Birmingham City FC for the 2011-12 season.
RationalFX is the official FX partner of iSportconnect.com
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