Money
Issue No. 51 - February/March 2010
Hedge to protect export profits
South Australian businesses need to plan ahead and work with their business banker to improve cashflow and mitigate risks as they head into 2010. NAB economists expect the Reserve Bank to continue raising interest rates during the next 12 months, which means local businesses must be aware of the risks to their operations.
Rising interest rates coupled with a volatile Australian dollar mean businesses should be looking for options which offer both flexibility and increased certainty in the market going forward.
During the past 12 months, businesses have had to focus on areas such as the sensitivity of their cashflow in light of volatile interest rate and foreign exchange markets. By working with their banks to manage these market risks businesses are better able to concentrate on the areas they can control and take advantage of opportunities that present themselves. In the current market we are seeing a trend in which businesses are moving away from traditional, fixed rates towards more flexible hedging products such as interest rate caps. By using interest rate caps, business operators can set the level of protection according to the maximum rate they can afford to repay on their debt. There are finance products available, such as NAB’s Business Markets Loan, which provide businesses with the flexibility of one loan product to move the hedging of their debt between floating, fixed, capped and collars.
This lets them effectively manage their exposure to interest rate movements, especially in a rising rate environment. It is important to note that managing risk in a changing interest rate environment should be determined on a case-by-case basis. Businesses need to seek advice, but also they should identify their own vulnerabilities, particularly in relation to cashflow and the areas where it could come under pressure. This must be a key priority.
In addition, choice of cover, hedge term, hedge level, fixed or participating elements, compet...
