Squeezing the margin.

Written by: Patrick Berndt from our Sales Desk.

Johannesburg, November 2023 – Corporate clients navigating the volatile world of Foreign Exchange management commonly aim to save money through squeezing the margin per trade. Job done – or is it?

Fortunately, there is another option available that can significantly save more for corporate clients in the long run, let me explain.

Before I do so, it is important to give some background as to how financial institutions (Banks and Financial Intermediaries) generate their revenue in Forex.

The Margin Unpacked

The Spot exchange rate is the baseline exchange rate quoted by the banks. A margin is then added over and above this rate to determine the revenue generated per trade. For an import client, for example, if the Spot exchange rate for USDZAR is R19.0000 and the negotiated margin is 6 cents, the exchange rate paid by the import client will be R19.0600. The same principle applies to any currency purchased.

Clients with substantial annual trading volumes generally wield greater bargaining power and aim to squeeze their Forex margins further in an effort to maximise savings.

An Alternative Proactive Option

In July of this year, I joined the RussellStone Treasury team as Head of Client Acquisitions.

We specialise in the execution of trades but differentiate ourselves as a source of proactive advice to our import and export clients. Our ultimate goal is to empower clients to make better informed decisions to save them money. Market timing is crucial and this realtime advice allows our clients to effectively implement hedging strategies against ongoing volatility. This is achieved by utilising FECs (Forward Exchange Contracts) as well as Derivative products.

The tangible savings, based on data from our historical client portfolio, are shown in Figure 1. It shows the average rate achieved by our corporate importer clients versus the average market exchange rate during a given month.

July figures were affected by an unprecedented swing in the USDZAR.

Let’s look at August 2023. If an import client had followed the proactive advice from our trading desk on a ZAR 10m payment, the potential saving to the client would have been 71 cents to the USD or roughly ZAR 378,464.82.

We achieved this by advising our clients in July, when the USDZAR moved to roughly R17,50, to take Forward Cover to lock in these rates. Our trading desk, through analysis of market conditions, anticipated that these rates were unsustainable and proactively contacted our importer clients to implement the forward cover strategy to lock in their rates.

What is important to gain from the above example, besides the savings that are possible through our proactive approach, is that banks and most other intermediaries can only help with squeezing the margin, they will not proactively contact you to discuss strategies that could potentially save you money in the long run.

Our Risk Management Offering

In Figure 2 below, we can see the average volatility of our clients’ portfolios compared to the market average over the previous six-month period (at the time of writing). This graph highlights the Risk Management expertise we offer our clients by utilising various hedging products to mitigate Forex risk and secure profits against their costed exchange rate.

Conclusion

At RussellStone Treasury, we pride ourselves in offering consistent savings and robust Forex Risk Management solutions to corporate clients through our proactive advisory mindset.

Corporate clients who benefit the most from our services have monthly conversions starting at R5m, or R60m per annum.

If you’re an importer or exporter seeking to optimise your Forex savings, we invite you to connect with us and explore how we can significantly boost your profitability.

We prioritise far more than just “squeezing the margin”.

?RussellStone Treasury is your defense in times of uncertainty.

We solve global financial market problems for our clients.

About RussellStone Treasury

RussellStone Treasury is part of the RussellStone Group. A 20 year old, 50 company, 1600 staff -strong business with an annual turnover exceeding ZAR 16 Billion. We are in the risk and opportunity management game as it relates to forex. We utilise Financial Engineering to develop unique, relevant market solutions for our clients.

We welcome the opportunity to speak to you about your forex and financial needs.

Contact me directly:

Patrick Berndt, CFA

Head of Client Acquisitions

[email protected] | 083 296 5150

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