UK banks failing SMEs on hedging

More than half of UK businesses with exposure to currency transactions totalling £20 million per year are failing to hedge their exposure, according to research produced by currency services firm Travelex in the UK. The lack of protection is due to a dearth of tailored offerings from banks for non-specialists in small to medium-sized enterprises (SMEs), said officials.

The Travelex survey of 50 UK firms last July found respondents from most SMEs had little understanding of hedging, and as a result relied upon spot transactions when payments were made or received.

Yogesh Shetty, group director of commercial foreign exchange at Travelex in London, said banks have not geared themselves for dealing with small companies. "SMEs talk to banks but find themselves confused by the jargon," he said. "As a result they do nothing and leave the potential for gain or loss uncovered."

The research found in the case of one wine importer that significant moves in sterling against the euro had led to sales at less than cost following translation.

David Lake, director of UK warrants at SG in London, said companies were often confused by the complex array of products offered by banks, and as a result had embraced the availability of simple tradable currency-based warrants. Lake has still been "taken aback" by the demand since launching the first currency warrants in the UK in June this year. As a result, SG is launching warrants for dollar/yen and euro/dollar pairs on the London Stock Exchange, in addition to the warrants for sterling against the euro and dollar previously available.

"These companies are exactly the type of clients who should use warrants," said Lake. This is because, unlike forwards, there is no downside risk beyond the nominal sum paid for the warrant, and the upside potential is a multiple of the actual move in the exchange rate, he said. As a result, SG has several SME clients, including a small airline.

In light of the research, Shetty is managing a new risk solutions service at Travelex that will work with companies regularly trading across borders to identify methods of managing their exposure for payments and also for their balance sheet. The main requirement for companies is the simplicity of approach, he said.

"On the retail side, we offer a ‘buy-back guarantee’ where customers can return unused currency at the same rate they bought at," Shetty said. "This is an option, locking in the forward rate by another name."

By taking this approach, Travelex successfully launched a similar programme for high-net-worth individuals four months ago. It will use its experience in this area for Risk Solutions. SG is currently the only bank offering UK forex warrants, but at least one other bank is planning to bring offerings to market in the future.