Managing foreign exchanges

Planning a tour is no simple task and neither is managing foreign exchanges in an unpredictable foreign-exchange market. Travel professionals need a strategic plan.

Every day, nearly $2 trillion worth of foreign currencies are traded in the global foreign-exchange market, where volatility has become the norm. Therefore, it is important for travel professionals to understand the risk and the process of managing risk.

The currency volatility in the foreign-exchange market creates uncertainty for profits and budgets for travel and tour businesses. While the volatility cant be controlled, travel professionals can take the following steps to protect their businesses and increase their bottom lines:

Many travel professionals look for convenience and low fees or rates when selecting a foreign-exchange supplier. They usually buy when a payment is due, compiling their accounts payable, and try doing large transactions at once.

Whether its transportation, hotels, bus rentals, tours or recreation, it is critical to plan how to hedge against currency risk. Because most travel professionals fix the price of their travel packages at the beginning of the season, they are prime candidates for hedging tools like forward contracts.

The forward contract, a management tool

Once a company has established an obligation to pay an amount of foreign currency, its costs are exposed to fluctuations in the foreign-exchange market. These risks can be eliminated through the use of a forward contract.

This enables the purchase of a specific amount of foreign currency at a secured rate of exchange for delivery on a set date, typically between a month and a year in the future.

A secured rate allows travel professionals to proceed with price listings and budgeting plans without currency fluctuations eroding profit margins.

What if hotel space is reserved for a meeting in another country to be held in six months, but the invoice wont arrive until next year? How will one know the cost when the currency wont be converted until a future date? By using a forward contract, a secured rate of exchange is locked in.

A success story

A&K Europe, a subsidiary of tour operator Abercrombie & Kent, understands the importance of leveraging risk-management tools to remain competitive.

When we price a tour in U.S. dollars, if we lock in a rate through a forward contract, we know how much the euros will cost, said Amanda Edlin, finance manager for A&K Europe. This allows us to protect the margin on our business and helps us to budget more efficiently.

Over the past three years, forward contracts have enabled A&K to thrive in a volatile foreign-exchange market. Because it locked in rates early, it was able to maintain competitive prices.

Sophisticated monitoring

Because currency rates fluctuate from minute to minute, staying informed of relevant world events and rate fluctuations is a basic means of managing foreign currency.

Underlying factors, such as economic statistics, politics and social conditions, drive the foreign-exchange market, affecting the amount youll pay and the potential margin you could save when purchasing or selling foreign currency.

Select an expert

Travel professionals are not expected to be experts on the foreign-currency market, but it is important that they choose a foreign-exchange supplier that is.

Foreign exchange is a service provided by banks and foreign-exchange specialists. As with any commodity, market expertise, timely updates, responsiveness, attention to detail, rates of exchange and service fees will differ from one supplier to the next.

Comparing service fees as well as exchange rates is an important consideration when choosing a foreign-exchange supplier.

Savings realized by a favorable rate of exchange can be quickly lost by poor service, missing opportunities to buy or not managing risk.

Most banking relations typically are not affected by the decision to use a foreign-exchange specialist, and you can always compare and use more than one supplier for your international transactions.

Whatever your foreign exchange exposure may be, seek the advice of a competent foreign-exchange supplier that will tailor a program to meet your needs.

Jane Budd is assistant general manager for Ruesch International in London. Prior to joining Ruesch in 1998, she worked for several years in the travel industry, holding sales positions with an incentive travel agency and a large tour operator. She can be contacted at [email protected].