Proxy To Hedge Against Baht Rise?

[sleepyjohn]

Hi

I am visiting a friend Thursday. He has a small but modestly successful precision machine tool business here. It has run for some years now.

70% of his custom is in Britain. This means his return and margins have dropped alarmingly. I have tried to encourage him that if he has survived this far it's a sign of strength. I have also suggested he may be able to hedge against the currency issue. I said I don't know of Thai currency contracts but that Singapore might be a fair proxy for the region and they may have some instrument suitable.

Can anyone suggest a suitable, reasonably do-able strategy?

cheers

[Naam]

no need to use any proxy because simple forwards GBP/THB would do the trick although it has to be done offshore as i was told it is difficult to do forwards domestically. but it sounds a bit awkward to me that a supplier hedges the potential proceeds from his customers. it should be the other way round... once a UK customer places an order which is invoiced in THB he should buy forward (matching payment time) THB vs. GPB.

[sleepyjohn]

no need to use any proxy because simple forwards GBP/THB would do the trick

by "forwards" are you saying it's possible to buy futures or options on the baht Naam?

although it has to be done offshore as i was told it is difficult to do forwards domestically.

I have about all permissions on IB but they surely don't do it?

once a UK customer places an order which is invoiced in THB he should buy forward (matching payment time) THB vs. GPB.

correct.

thanks for answering and would love any more specific info from you or anyone......

cheers.

[wordchild]

using some sort of currency hedge to protect your expected customer revenue is one of those things that sounds perfectly reasonable in theory but very difficult to add value in practice.Think about it, what level could you hedge strerling against the baht/sing dollar proxy 3/6/9 months out right now? ( a few ticks above the current daily spot rate at best) and why would that be worth doing? the problem is you have to do it consistantly, in which case you are just smoothing out fluctuations and likely lowering your returns further or you have to take a view, in which case you are a currency trader.And that can end up distorting your business. My philosophy ,for what its worth, is take it on the chin ,regard it as part of the ebb and flow of business, try to find other ways to bring your costs and revenues in line,eg invoicing in your base currency as far as possible as Naam suggests. I have tried to look at this from every angle over the years in a number of businesses and in the end come to the conclusion,keep it simple!

Edited April 1, 2010 by wordchild

[Naam]

no need to use any proxy because simple forwards GBP/THB would do the trick

1. by "forwards" are you saying it's possible to buy futures or options on the baht Naam?

although it has to be done offshore as i was told it is difficult to do forwards domestically.

I have about all permissions on IB but they surely don't do it?

once a UK customer places an order which is invoiced in THB he should buy forward (matching payment time) THB vs. GPB.

correct.

thanks for answering and

3. would love any more specific info from you or anyone......

cheers.

1. that is a possibility but a straight forward is much simpler. to hedge GBP vs. THB all what you do is sell or buy (depending on your expectations) x-amount of GBP against THB to be settled at a date you select (period normally maximum 12 months). that enables you to close the deal any time within that period should the exchange develop against your expectations (one of the currency pair getting stronger). cost is the difference between GBP bid price and THB ask price as well as the difference in interest rates and of course the bank fees (the latter can vary).

advantages:

-no cash money involved till settlement date,

-you have locked into exchange rate the minute the deal is concluded.

2. i don't know what "IB" means.

3. that's about all.

[sleepyjohn]

Thankyou for your keen observations Wordchild.

And thanks too Naam I wasn't aware it could be fixed now and settled later like an "advance booking". I think you're saying you fix the deal for settlement at a future date but at the rate of the day of the initial forward agreement.

I shall offer this and Wordchild's advice to my friend and wait on how interested he is before pestering anyone for further detail about where to do etc.

2. i don't know what "IB" means.

Interactive Brokers.....

cheers John

[torrenova]

I get the feeling that the product has been priced for sale in GBP and not THB, thus placing all the FX risk on the supplier instead of the consumer.

Small forward rate agreements can be non cost effective. I only have wholesale experience and we do not know the value of the OP's products.

A lot will depend upon why his product is attractive. If it is purely on price then there is a problem. If it is quality then raising the prices should be possible. I would look to move away from GBP pricing but offer pricing at current GBP values rather than hedging potential future customer orders. Unless you have pre orders, you cannot hedge the unknown anyway !

If online, it is easy to add a currency selector to the website, or to have the site auto calculate the currency based upon the IP address. So UK customers would see it in GBP and USA customers would see prices in USD. It would be possible to auto round those figures so that a conversion which came out as 50.93 was repriced automatically as 49.99. You could even manage this from home and have prices which selected automatically depending upon currency.

[Gambles]

Onshore NDFs (unless BoT has changed policy) are so strongly discouraged that they don't normally exist.

So you have to look offshore

Do InteractiveBrokers offer this as a transparent NDF contract? I'd be keen to hear more about that although I'd hate to imagine the mebdded costs

We deal with institutions who offer global investment and income portfolios hedged to Baht and currently they have to buy rolling 3/6/12 month offshore contracts (based on the offshore reference rate) but with our providers I think that they can only get USD:THB and SGD:THB (plus presumably the inverses. However hedging from Baht if possible might be more expensive?? One idea to hedge from Baht is to establish a margin account with an onshore broker and look to short the SET in periods of Thai crisis - far from perfect but gives some room for manoeuvre in the worst case and in any case it seems that we're talking fixed GBP price here so it's hedge from GBP that you'd need) in which case you'd then also have to buy GBP:USD/SGD

[Naam]

Small forward rate agreements can be non cost effective. I only have wholesale experience and we do not know the value of the OP's products.

percentage wise there is no difference at all as we are not talking forwards of 10k GBP or 500k THB.

[Naam]

Onshore NDFs (unless BoT has changed policy) are so strongly discouraged that they don't normally exist.

So you have to look offshore

to the best of my knowledge THB NDFs never existed.

[Naam]

One idea to hedge from Baht is to establish a margin account with an onshore broker and look to short the SET in periods of Thai crisis...

[torrenova]

to the best of my knowledge THB NDFs never existed.

You may well be correct. I don't recall any but that doesn't mean there weren't any.

Cross currency swaps with THB certainly exist but it would almost certainly prove impossible due to the duration between order and delivery.

[Gambles]

to the best of my knowledge THB NDFs never existed.

You may well be correct. I don't recall any but that doesn't mean there weren't any.

Cross currency swaps with THB certainly exist but it would almost certainly prove impossible due to the duration between order and delivery.

I think that BoT doesn't like anything longer than T+2

If only central banks in countries like Greece kept such a tight rein......

[torrenova]

I think that BoT doesn't like anything longer than T+2

If only central banks in countries like Greece kept such a tight rein......

BoT cannot stop derivatives or speculation on THB any more than the Fed can on USD or the bank of England can on GBP.

[Gambles]

I think that BoT doesn't like anything longer than T+2

If only central banks in countries like Greece kept such a tight rein......

BoT cannot stop derivatives or speculation on THB any more than the Fed can on USD or the bank of England can on GBP.

WRONG!!!!!!!!!!!

generally Baht trade is onshore

you need a license

you don't play by the BoT rules you don't get a license

BoT has really kept a lid on this. It is much easier for BoT to do than with fully freely tradeable currencies