When it comes to managing FX risk, I have a firm belief that if you can’t price something, you shouldn’t be doing it. Why? Because it is extremely expensive.
This is why large companies pay tens of thousands of dollars for data and information. It is also why I hear constant complaints that there is no longer any money in institutional FX. The only thing that is different between institutional-level clients and smaller clients is access to pricing information and tools. Statistically, it’s unlikely we are smarter or better negotiators than those in smaller companies!
Without information, you are swinging in the dark. Lined up against friendly people who are highly incentivised to maximise revenue for their organisations. Smooth sales techniques, wrapped in sophisticated market talk. Remember, this is a zero sum game – every point in margin you give away is a point of revenue for your dealer.
A demonstration of this point is the proliferation of options offered in the FX market, particularly in the SME space. Options are being offered more and more to less and less sophisticated customers. Is this because there is more optionality in the cash flows of customers? Absolutely not. Do FX providers make more revenue from options than they do from more vanilla alternatives? Absolutely. When your customer has no reference for the pricing of what you are offering, the price often ends up being “what I think I can get away with.” It’s not just with options this happens, FX forwards are the same.
Clearly, the only way to have an intelligent conversation about how much revenue you are paying to your dealer is to know how much that revenue it actually is. You can’t negotiate in the dark, and your dealer is never going to put their hand up to reduce their own revenue. If you don’t know what is being earned on the FX hedging products you are buying, then it is definitely more than you think.
Historically, access to FX pricing and information has been the domain of large organisations as it has been prohibitively expensive. This is why we built FairDealFx – to bring some balance to the conversation SME’s have with their FX providers. If you’re ready to step out of the dark and into the light, sign up here for your free trial.
If you execute FX risk management transactions below, let me know how you ensure you’re not paying too much away in margin below!