Hedging against currency risk 'can save charities money'

Charities spend £6bn a year on currency but are they getting a good deal? David Ainsworth investigates

Do charities spend too much on foreign currencies, and do they take too much risk when they do so?

It's a question that the international animal welfare charity The Brooke has recently tried to address with a new strategy to fund operations overseas by handling foreign exchange. The strategy, the charity believes, will not only reduce risk but also save money.

The Brooke plans to start hedging against currency risk by buying forward contracts for about 60 per cent of its foreign currency at the start of the financial year.

Sue Coles, director of resources at the charity, says that by hedging against currency risk The Brooke has so far protected itself against exchange rate fluctuations that could have cost it up to £500,000 a year.

And she says that because interest rates are better in other countries than in the UK, hedging gives them access to better rates than holding money in sterling and buying currencies as and when they are needed. "The amount of money we came in under budget by buying in advance was about £25,000," she says.

Other charities have also looked at measures that could be taken to improve the situation. One of these is called Stamp Out Poverty, which supports aid organisations' finance functions.

The charity produced a report last year, Missing Millions, which estimated that in addition to the problems caused by currency fluctuations, charities lose up to £50m because they do not get the best deals when buying currency.

"The idea that international charities should get a better deal on currency is starting to snowball," says Nana Boakye-Adjei, a researcher for Stamp Out Poverty. "Charities spend £6bn a year on currency, so it's a big issue. We're now planning a second paper that will give clearer case studies and look at solutions."

One specific idea in which Stamp Out Poverty is interested is setting up a single organisation to buy currency for charities. It's a proposal being explored by Andrew Derry, the founder of NGO Treasury Services, which provides currency services to international charities.

"This idea is a good one, but it involves a lot of work," says Derry, who advised The Brooke on its new strategy. "One key question is how you would apportion the risk correctly between the charity that needs the currency and the buying organisation."

Topics:
Finance

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