Limit Orders and Forwards: Case Study

Expanding into new markets can introduce unfamiliar FX risks and operational challenges. This case study explores how Marex supported a UK-based business in improving stability and forecasting with the use of limit orders and forward contracts. 

Overview

For experienced treasurers, nothing in this case study will be too surprising. But for companies exploring new markets and unfamiliar situations, the approaches described here are important strategies. 

Our client is a long-established company based in the UK that sells used farming equipment on both sides of the Channel. 

Client challenges and FX exposure

Exposure to currency markets

When EU trading relationships changed, our client looked for ways to ensure continuity for their customers. One way to do this was to invoice their European clients in euros, rather than just pounds. 

After taking an order on the Continent, they would deliver the goods and receive euros. 

In doing so they quickly found themselves in the world of currency trading and were confronted with the challenges presented by adverse market moves when they sold euros back into pounds. 

Banks were not offering the best rates, but the real issue was stability and forecasting. 

If currency markets were quiet, their cashflow and profits were predictable. But when the exchange rate moved, their model broke down. 

Whilst normally hedging with vanilla FX forward contracts, we agreed to exchange a set amount of currency, at a set rate, at a defined date in the future. 

By using some optionality, we could accept a slightly worse rate than the forward, but with the opportunity to benefit if the spot market moved favourably. 

This meant that the client always had a known worst-case rate of exchange, but the opportunity to improve by up to 1.5–2% versus the forward if the market moved favourably. 

A small percentage gain, but in a world of tight margins, this could improve the profitability of a lease by around 30%. 

Impact on margins and pricing

Short-term currency moves could hinder margins and, ultimately, profitability.  

Longer-term currency moves could also cause problems. Continued movements in a currency would render a price list redundant and risk the client becoming uncompetitive or facing outright losses. 

Both were giving the business challenges. 

FX strategy and proposed solution

Limit orders for the short term

Limit orders are a way of using a wider window in time to target a better rate. You can target a stronger rate by triggering a sale at the higher limit of your profit aspiration. This allows the market to work for you rather than against you. 

Limit orders work even when you are not continually focused on trading screens, which makes them particularly useful. They operate when the markets are open, without requiring constant monitoring. 

Forward contracts for the longer term

This required a different approach to short-term currency movements. 

We used a forward contract to cover 50% of their forecasted sales. This locked in a price for sterling and guaranteed the smooth operation of the business for the next 12 months. 

If sales were quieter, they were not overcommitted because they were only covering half the amount. 

The forward contract was structured so that it could be drawn down as and when needed. If equipment was sold in line with agricultural seasons, this ensured there was no disruption. 

Implementation and delivery

Marex could see that there needed to be a series of measures for both the immediate and long-term. 

Results and outcomes

Together with additional limit orders for the remaining 50% of sales, the business was well positioned to manage a range of market conditions. 

The business continues to do well and is able to look ahead to the next year knowing that we have given them less things to worry about, knowing that the FX strategy has reduced uncertainty and improved stability.