Scotland: considering a new currency strategy

UK businesses will need new currency buying strategies if there is a yes vote in the Scotland independence referendum on 18 September, says Smart Currency's director, Carl Hasty

Speculation surrounding the upcoming vote for Scottish Independence on 18th September 2014 has been rife. What was once considered an unattainable idea is now more feasible, with new polls showing strong support for a ‘Yes’ vote.

A vote in favour of Scottish Independence would alter the DNA of business in the UK as we know it. Whether it is the Royal Bank of Scotland moving to England or a potential revision in the UK flag, a ‘Yes’ vote would bring change to the systems and process that UK businesses are currently used to.

Currency options

There are a number of alternative currency options available to Scotland should it vote in favour of independence. These include forging a currency union with the UK, unofficially adopting sterling or another major currency, establishing a new Scottish currency – which would be either free-floating, or pegged against another currency, like sterling – or seeking entry into the Eurozone – which means adopting the euro.

How UK-Scottish trade will work will depend on a multitude of factors, involving political, economic and social divisions, laws and regulations. UK businesses that are currently not exporting overseas but that trade in Scotland will need to take up the task of exporting to an independent Scotland, which can involve changes in their operations.

Should Scotland depart from the UK and take up a non-sterling currency, UK businesses that decide to continue to trade with the newly-independent country will have to change the way they approach their currency needs. For example, budgets may involve higher variable costs, due to expenses that are no longer paid in sterling.

A newly independent Scotland would be traversing unchartered territories – figuratively speaking – which could cause sharp fluctuations for its currency. This would make forecasting income and expenses trickier for businesses that remain in the UK. Forecasts would be fraught with more risk, which could significantly affect a business’s profitability.

Risk management strategies

There is a variety of solutions for saving on currency costs and mitigating risks on international payments, whether Scotland decides to adopt its own currency, the euro or other major currency. These include:

Spot contracts

Businesses that cannot estimate their currency requirements in advance will find spot contracts useful, letting them buy or sell currencies at live rates. However, a spot contract can leave a company vulnerable to currency market volatility, which could be intensified given the unknown variables that would arise from a Scottish secession from the UK. Businesses with spot contracts would need access to competitive live rates in order to cut down on currency costs.

Forward Contracts

A forward contract is particularly useful for companies that plan their currency in advance, as it allows them to ‘lock in’ currency rates, thereby knowing exactly how much they will be spending on a currency exchange. This will help them to budget more effectively.

Flexi-forward Contracts

A combination of elements from spot and forward contracts, this allows a business to set a budget currency exchange rate, but also to buy or sell at live rates, if required. This could be useful for businesses trading with a newly independent Scotland, as it would allow them some amount of control over how much they will spend on currency exchange rates.

New strategies

Trading with a newly independent Scotland would not be like trading with any other overseas country. Given Scotland’s close ties with the UK, the secession process may be prolonged, which is liable to cause constant change. As this would be reflected in currency markets if Scotland withdraws from sterling, UK businesses trading with Scotland will need new strategies and to keep a finger on the pulse of the currency market, in order to ensure that they minimise losses and mitigate risks when trading with Scotland.

 

About the author

Carl Hasty is the director and Co-founder of international payment specialist, Smart Currency Business www.smartcurrencybusiness.com

Carl Hasty |Director and co-founder, Smart Currency Business

Carl Hasty is the director and co-founder of international payment specialist, Smart Currency Business. He has over 14 years’ expe...

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