Brexit offers opportunities to smart entrepreneurs

Currency markets are facing uncertain times due to the approaching Brexit. Entrepreneurs do not need to await the developments. They can personally take action to protect the profit margin and their position on the British market.

The news that a small majority of the British population voted in favour of a Brexit, was heard nowhere as loudly as on the currency markets. The British pound fell by 7.5 per cent compared to the euro between Thursday evening, when results started trickling in, and Wednesday morning. Compared to the American dollar, the damage was even more than ten per cent. The rapid drop in currency values has large consequences for all Dutch companies doing business in the UK.

For now, it is important to deal with the fluctuating exchange rates in a decent manner. It is impossible to predict how the Brexit will be shaped and what the influence will be on the economy of the UK and the EU. This creates a challenging situation for, for example, a Dutch bell pepper cultivator who exports 20 per cent of his harvest to the UK.

Because of the deprecation of the British pound, the cultivator has become 7.5 per cent more expensive on this market compared to local suppliers. There is a good chance the difference will become even bigger as the uncertainty persists and the pound drops even lower. On the other hand, it is also possible that the British pound makes up for part of the loss when there is more clarity on the separation. 

The cultivator now has several options. The first choice is to do nothing and to await the coming months. In that case, the cultivator runs the risk of being priced out of the British market because of a further drop in the pound. He will then have to look for new markets. A second option would be to move part of his production to the island. This would lower the currency risk, but it would require necessary long-term investments.

A third option would be to buy protection against future price fluctuations. In the case of the bell pepper cultivator that would be best and simplest with a foreign currency option. That is a type of insurance which gives the right to exchange pounds against a certain price for the Euro. This way, the cultivator is protected against a further decreasing pound. The advantage is that the entrepreneur profits when the price of the pound recovers.

It could also be a good idea for entrepreneurs purchasing in the UK to take steps now. By concluding a forward contract, a company can now ensure that all future deliveries can be settled at the current low exchange rate, even if the pound rises again in the meantime. Entrepreneurs who cleverly deal with the possibilities of currency trading can protect the margin in uncertain times this way, and be one up on the competitors.

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