Brexit and woodworking

[Jake]

Terry
I know what Hedging is.
Please explain how I, personally, can Hedge against the cost of my food, my petrol, my energy, my clothing, and anything else I wish to buy.

Steve

We were not talking about you, I said companies were profiteering, you said they were not and had no choice but to change prices the moment exchange rates move. So I do not understand why you now ask how you can hedge.

However, the most basic form of hedging is matching costs and revenues in terms of currency. So if you have a pound only income but non pound costs, for example you buy imported food that is produced in the US you could generate a US Dollar revenue stream by selling pound assets and buying US Dollar bonds. Alternatively you could realign your cost base by buying only food produced in the UK.

Alternatively you simply need to determine which currencies you are long or short in and then use spread betting to hedge your exposure.

A few years back for tax structuring reasons I ended up with a large holding of US Dollar bonds the coupon from which I used to pay my sterling denominated mortgage. In order to ensure my mortgage repayment could be made I simply placed a bet on the dollar buying fewer pounds in the future (sized to cover my dollround exposure). If the dollar did buy fewer pounds my bond coupon shortfall was made up for by the gain on the dollar vs pound bet, if the bet went against me the pound value of my dollar coupons exceeded my mortgage by enough to cover the loss on the bet.

THIS IS NOT FINANCIAL ADVICE, I AM NOT SUGGESTING SPREAD BETTING IS APPROPRIATE FOR YOU OR ANYONE ELSE READING THIS, YOU CAN LOSE A LOT OF MONEY BY SPREAD BETTING ON THE MARKETS WHEN YOU DO NOT UNDERSTAND WHAT YOU ARE DOING.

Terry.

Did you buy insurance on the spread-betting company going bust or not paying out?

 

[Wizard9999]

No point, I would only have had to take out insurance against the insurer going bust as well. :lol:

Terry.

 

[Steve Maskery]

Hmm. So my fundamental problem is my financial illiteracy.
Thank you for the education.
I'm still 10% poorer.

 

[Wizard9999]

I'm still 10% poorer.

Steve

How do you reach that conclusion? I think you may be depressing yourself somewhat more than you need to.

Terry.

 

[AJB Temple]

You can lose a lot of money when you do think you know what you are doing as well. Spread betting, where you put capital at risk, potentially (usually) in multiples of your initial margin is a high risk bet. It is gambling not hedging when trades are leveraged.

Realistically, most small to medium businesses do not have the expertise or confidence to hedge currency exposures. Even if they did, few have the resources to hedge very far out. And hedging a long way out is a different form of bet on currency fluctuations (even if it is not leveraged) versus your cash flow. And for most small businesses, the market prices they can get from banks and typical service providers are significantly different to those available to high value currency traders.

And even then, it would not be a reason to adjust prices. This is because if their purchasing power has been reduced by a fall in £ v $ for example, even if they have hedged that exposure in the short term, they will be replacing stock at the new prices. Business hedges for the benefit of the business, not the consumer, so these new higher costs and prices are anticipated and passed on straight away (crystallising a permanent gain from the hedge rather than passing it on to the retail consumer). This is why businesses put prices up straight away.

 

[Wizard9999]

You can lose a lot of money when you do think you know what you are doing as well. Spread betting, where you put capital at risk, potentially (usually) in multiples of your initial margin is a high risk bet. It is gambling not hedging when trades are leveraged.

Realistically, most small to medium businesses do not have the expertise or confidence to hedge currency exposures. Even if they did, few have the resources to hedge very far out. And hedging a long way out is a different form of bet on currency fluctuations (even if it is not leveraged) versus your cash flow. And for most small businesses, the market prices they can get from banks and typical service providers are significantly different to those available to high value currency traders.

And even then, it would not be a reason to adjust prices. This is because if their purchasing power has been reduced by a fall in £ v $ for example, even if they have hedged that exposure in the short term, they will be replacing stock at the new prices. Business hedges for the benefit of the business, not the consumer, so these new higher costs and prices are anticipated and passed on straight away (crystallising a permanent gain from the hedge rather than passing it on to the retail consumer). This is why businesses put prices up straight away.

I think that in part we are agreeing AJB, as I said, building margin was a motive because they are seeing this as a way of getting prices up with all the post vote stories in the media as of course they did not drop prices yesterday when the point went up versus the dollar by nearly 2%. I will bow to your experience on the costs of hedging for SMEs as I know from other posts you are a successful businessman and my experience is mainly from large, international banks or multinationals.

You are of course absolutely correct about the dangers of spread betting, which is why I gave the very clear warning at the end of my post. I do not want to be responsible for anyone losing their shirt, which is why I don't want to get into a debate about how to structure hedges appropriately for a particular objective.

Terry.

 

[Jake]

No point, I would only have had to take out insurance against the insurer going bust as well. :lol:

Hardly the perfect hedge then, spread-betting companies are very thinly capitalised.

 

[Random Orbital Bob]

Phew....the IQ of the forum just went up a point or two....well done chaps

Now can we get back to discussing how to extract a knackered screw please :shock:

 

[lurker]

Bobbily,
Maybe you could move it to chat where it really belongs

 

[bugbear]

Phew....the IQ of the forum just went up a point or two....well done chaps

Now can we get back to discussing how to extract a knackered screw please :shock:

HTH.

what-metal-is-a-telescopic-aerial-made-of-t96804.html

BugBear

 

[Random Orbital Bob]

That's the ticket BB

 

[Stu_2]

And talking to machinery dealers about some new kit we are looking at, the prices are starting to go up quite fast as well, which means that I am looking at a couple of grand more than I would have.

I suspect a lot of suppliers are looking at the media making lots of comments about imported inflation due to a lower pound and seeing an opportunity to build some margin.

Terry.

Spot on. To be changing the prices on goods already paid for is profiteering at our expense.

However, if their payment terms are extended out, then it's a different story, as they'll be impacted by the exchange rate at the time the payment is processed.

 

[tomatwark]

And talking to machinery dealers about some new kit we are looking at, the prices are starting to go up quite fast as well, which means that I am looking at a couple of grand more than I would have.

I suspect a lot of suppliers are looking at the media making lots of comments about imported inflation due to a lower pound and seeing an opportunity to build some margin.

Terry.

I have ordered my stuff this morning and got it at the current price but if I had left it until next month as was the plan it would of been higher.

I am buying Italian kit and not Chinese imported stuff and it is the exchange rate for the Euro that is causing a lot of the rise.

However the start of the thread mentioned a timber firm that is putting up their prices now, most timber importers are working 6 months ahead and allow for currency fluctuations, this seems that it may be a bit of trying to make more money.

I am expecting the price of timber to start to rise but not for a couple of months.

 

[RogerS]

We need manufacturing, but not any old manufacturing. Some years ago a brewery local to me celebrated (while they were still solvent) a huge contract sending slabs of beer to Moscow. Anyone with half a brain could see that at best they were buying work, at worst risking losing a lot of money. They managed both. We need to be building the world's best computers, cameras, hifis etc. that are high value, low bulk, and low (comparatively) on imported material costs - this is not the place for high weight and volume low value manufacturing, China can keep that.

I agree with you, Phil, apart from one minor - nay, 'trivial' - point. Namely, the man in the street seems to know the cost of everything and the value of nothing. For the majority, price is, sadly, always going to win out over quality. I wish it were not so.

 

[Phil Pascoe]

Certainly - but that's not the market to aim for, nor has it the money.

 

[lurker]

We need manufacturing, but not any old manufacturing. Some years ago a brewery local to me celebrated (while they were still solvent) a huge contract sending slabs of beer to Moscow. Anyone with half a brain could see that at best they were buying work, at worst risking losing a lot of money. They managed both. We need to be building the world's best computers, cameras, hifis etc. that are high value, low bulk, and low (comparatively) on imported material costs - this is not the place for high weight and volume low value manufacturing, China can keep that.

I agree with you, Phil, apart from one minor - nay, 'trivial' - point. Namely, the man in the street seems to know the cost of everything and the value of nothing. For the majority, price is, sadly, always going to win out over quality. I wish it were not so.

It's not just the man in the street. I work for a fse100 high tech company and our procurement folks are bluddy morons

 

[Dinky78]

Necro thread but have perceptions changed. If there is to be greater internal investment might that be a driver for economic growth after all?

The proposed US economic model looks a bit like protectionism with internal infrastructural investment, potentially driving short to possibly medium term economic growth. Might be inflationary of course but if the US Treasury continues to print $ to repurchase debt in a way that balances the exchange rate aporopriately then maybe less so. It might require interest rates to rise a little but if there are massive capital flows coming back onshore as a result then liquidity could shoot up and drve up both bond and equity markets.

Replicate that in the UK (internal infrastructural investment) and with the weaker currency we may see further significant global investment into the Uk ...driving jobs and economic growth.

The future could be Rosey! (whoever she is!)