What if your margins evaporated because of an enemy you can't even see?
For French SMEs involved in international trade, currencies are a silent battlefield. A 5% fluctuation in the euro-dollar exchange rate, for example, could well wipe out all your profits.
With $5.1 trillion traded daily on the Forex futures market, according to the Bank for International Settlements, exchange rates can turn a promising sale into an unexpected loss. In 2023-2024, EUR/USD fluctuated between 1.05 and 1.12, while GBP/USD saw variations of 10%, according to Bloomberg.
As we'll see later, currency fluctuations have a direct impact on the amount you receive or pay.
These fluctuations threaten your international payments and margins, but there's a weapon at your disposal: forward contracts, whether forwards or futures. Let's find out how to use them to protect yourself.
A futures contract is an agreement to buy or sell an asset - in this case, a currency - at a pre-determined price on a future date. This generic term encompasses two main types of forward contract: forwards and futures.
- Forward contract: Traded over-the-counter (OTC), this is a customized contract between two parties, flexible enough to meet a company's specific needs. For example, an SME can fix 1 EUR = 1.05 USD for a payment of 1 million USD in 6 months' time. However, it involves a higher counterparty risk, as it is not guaranteed by an exchange.
- Futures contract: Standardized and traded on exchanges such as the CME Group or Eurex, it reduces counterparty risk thanks to clearing houses. An SME can buy EUR/USD futures for USD 250,000 at EUR/USD 1.05, with greater liquidity but less flexibility.
According to the Bank for International Settlements, forwards account for 25% of the $5.1 trillion traded daily on Forex, while futures capture 15%, according to the CME Group, popularized by traders but accessible to businesses. These tools are essential for securing your transactions on the futures market.
Exchange rate fluctuations have a direct impact on the amount you receive or pay:
- If you export, you benefit if your domestic currency (such as the euro) depreciates against the buyer's currency (such as the dollar), as your products become cheaper and more competitive internationally, increasing your margins. Conversely, if your currency strengthens, your exports become more expensive, reducing your profits.
- If you're an importer, it's the mirror effect: a depreciation of the euro increases the cost of your foreign purchases, squeezing your margins, while an appreciation of the euro improves them by making imports less expensive.
And currencies are unpredictable. In 2023, EUR/USD fluctuated by 7%, from 1.05 to 1.12, according to Bloomberg. For a French SME buying USD 1 million of components in the USA, this means a loss of €71,429 if the rate falls to 1.00 EUR/USD. An SME exporting 2 million GBP to the UK saw its margins slashed by €181,818 in 2024, with a fall from 1.20 to 1.10 EUR/GBP.
Let's take a simple example to explain. An SME exports wine to the UK with a contract worth 500,000 GBP at 1.20 EUR/GBP. If the rate falls to 1.10 EUR/GBP (in other words, if the Euro appreciates), the SME could lose €50,000:
- Initial value in euros:
-500,000 GBP × 1.20 EUR/GBP = €600,000.
-This means that if the SME receives GBP 500,000 and immediately converts it at this rate, it will receive €600,000.
- Falling exchange rate : If the exchange rate falls to 1.10 EUR/GBP (1 GBP = 1.10 €), the value in euros of the 500,000 GBP falls:
-500,000 GBP × 1.10 EUR/GBP = €550,000.
-The SME therefore receives €550,000 by converting its GBP500,000 at this new rate.
- Calculating the loss: To determine the loss incurred, compare the initial value (€600,000) with the new value (€550,000):
-600 000 € - 550 000 € = 50 000 €.
These risks affect 60% of European SMEs, according to Eostat, who report Forex losses, especially for exotic currencies such as the South African rand (ZAR, 12% volatility in 2023, according to XE.com). Exports/imports, supplier payments and international services are all vulnerable, threatening your cash flow and competitiveness.
Futures contracts - whether forwards or futures - lock in a rate, eliminating uncertainty. Here's how they work to protect you:
- Forward contract example : A French textile SME plans to pay a Chinese supplier 500,000 USD in 6 months' time. It signs a forward contract at 1.05 EUR/USD, fixing the cost at €476,190. If the rate falls to 1.00 EUR/USD, the company saves €25,000. This "example futures contract" illustrates OTC flexibility, adapted to specific needs, but with a counterparty risk.
- Example of a future contract: A small business exporting USD 250,000 to Canada buys a EUR/USD future contract on the CME at EUR/USD 1.05 for 3 months. If the rate falls to 1.02, it avoids a loss of €7,353, thanks to stock market liquidity and low counterparty risk. This "future contract example" demonstrates the benefits of standardization.
According to PwC, 70% of large companies use these tools, but only 30% of SMEs, leaving an opportunity to secure their margins in the face of growing volatility (10% for certain currencies in 2024).
Protecting your currency requires a strategy. Here's how:
- Analyze your needs: evaluate volumes, currencies (EUR/USD, GBP/EUR) and durations (3, 6, 12 months). A small textile company chooses a EUR/CNY forward for 3 months on 300,000 USD.
- Choose forwards or futures: Forwards for flexibility (OTC, customized), futures for liquidity (exchange, standardized). An ETI prefers EUR/JPY futures on the CME for liquidity.
- Keep an eye on volatility: use Bloomberg Terminal to track EUR/USD (7% volatility in 2023) or GBP/USD (10% in 2024).
- Reliable partner: Work with expert negotiators like Keewe to minimize costs and risks.
An SME avoided a loss of €15,000 in 2024 with a EUR/CNY forward, while an ETI secured €12,500 with EUR/USD futures on the CME.
At Keewe, we help you tame currency fluctuations with forwards and futures. Our FX desk is your trump card: an accessible human touch, the opportunity to ask questions and trade contracts live with our advisors - real people. Whether you prefer a customized forward for a payment of 1M USD in 6 months or standardized futures on the CME, our expertise guarantees competitive rates thanks to multiple provider queries and real-time trading.
Example: An SME reduced its Forex costs by 20% in 2024 with a EUR/USD forward traded via our desk, securing its margins on a USD 750,000 contract. Keewe simplifies your trading, making it as competitive as it is sustainable.
Futures contracts - forwards and futures - are essential tools for small and medium-sized businesses when it comes to dealing with fluctuations in the Forex market. By fixing a rate, you eliminate uncertainty, protect your margins and optimize your international payments. With volatility of 7-12% on key currencies in 2023-2025, and 60% of European SMEs affected by losses, the time to act is now. Master your currencies with Keewe - www.keewe.eu - transform your risks into financial opportunities, simply and efficiently!