A common technique used by FX business development managers to bring new clients on board is to agree a margin with new clients. This is often agreed as a number of points from the market price. Unfortunately, there is a key flaw in this approach for the client, and now is probably a good time to revisit your pricing you’ve agreed if you have done this.
The reason the issue arises with this type of pricing is best demonstrated in an example. Say you agreed with your FX provider to do every trade 30 points from market. At the time, AUDUSD was 0.9000. You execute a trade to buy USD100,000 at 0.8970. The revenue on this trade for your transaction is A$371.61 (100,000/0.8970 – 100,000/0.9000).
Fast forward to now and the AUDUSD is 0.7500, so your USD100,000 deal is transacted at 0.7470 – the margin of 30 points remains static. However, the revenue on this deal is A$535.48, an increase of 44%.
Of course this knife cuts both ways, but you can guarantee your margin will be revisited where it moves against your FX provider.
In order to ensure that what you pay for your FX execution remains static with movements in underlying FX rates, you are much better off agreeing a margin as a percentage. Fortunately, FairDealFx will calculate both the revenue you are paying away and the percentage margin automatically for you as you speak to you dealer. So if you want to take control of the cost of your FX hedging program, sign up here!