No, they’ve got this wrong about hedging losses

The slide in the pound since the Brexit referendum vote almost wiped out annual profits at the family firm of George Osborne.

Osborne & Little, the upmarket wallpaper and furnishings company controlled by Sir Peter Osborne, his father, incurred currency hedging losses of £855,000 last year after sterling collapsed in response to Britain’s vote to leave the European Union.

Mr Osborne, the chancellor under David Cameron’s Conservative government, on whose watch the referendum was held, is among the company’s shareholders.

Osborne & Little made pre-tax profits of £73,000 on sales of £33.8 million in the year to the end of March. Without the hedging losses profits would have hit £928,000.

The company has a big US subsidiary and North America accounts for just over half of overall sales. Its revenues and expenses are denominated mainly in dollars. To minimise currency risk the company uses “forward contracts covering 40 per cent and 70 per cent of the forecast exchange exposures for up to two years ahead,” its accounts show.

Sigh.

This is a timing issue, nothing more.

Despite the costly hedging losses Osborne & Little reiterated that “if exchange rates stay as they are, in particular the exchange rate between sterling and the US dollar, then there will be a material benefit in the current year ended March 31, 2018”.

Quite so, they’ve hedged for 12 to 24 months ahead. You take the losses on your hedge as soon as the rates change. You collect the profit from having hedged over the 12 to 24 months as the cash rolls in. Net they should be flat minus the premium they paid for the hedge.

Sigh, The Times used to be better than this.

11 comments on “No, they’ve got this wrong about hedging losses

  1. In general the more Marxian trained scum outflows from the Uni-sewers the wider their bullshit is shovelled.

    Purge Now.

    When you add in all the WOMC/CMLBS* it is obvious why Remainiac trash is still being spewed by the MSM.

    * “Well Off Middle Class Cultural Marxist London Bubble Scum”

    Henceforth to be known as “Wombclimbs” . With connotations of being some kind of womb-carried monster that climbs out of its dead mother under its own steam.

    The birth of an insulting acronym as well. Truly all human life is here displayed.

  2. the company uses “forward contracts covering 40 per cent and 70 per cent of the forecast exchange exposures for up to two years ahead,” its accounts show.

    The quote marks indicate that the author has no idea what he’s writing about and doesn’t want to take responsibility for it.

    So it’s not worth wasting time on.

  3. TMB, a perfectly sensible strategy to purchase forward exchange contracts to hedge against currency fluctuations when future payments/receipts are known. If those contracts were to be redeemed or utilized today (depending on whether they are date fixed or have a date range) then there is every possibility that the contract rate may be more than today’s spot rate for the purchased currency. It is also entirely possible that the contract rate might be less than the spot rate for the currency on the date that the forward exchange contract matures.

    Apologies if I’m stating the bleeding obvious but the bleeding obvious never occurs to Grauniad journalists.

  4. Not the Grauniad in this case (my mistake), but The Times! FFS there was a time when you trust their financial section.

  5. HC – thanks for taking the trouble.

    My point was rather that the writer didn’t understand what he was writing as evidenced by quoting directly from his source rather than paraphrasing it or taking the words for his own.

    Taken in isolation the bit in quotes doesn’t make much sense either which bears out what one of my schoolteachers used to say about unseen translations, namely that if it doesn’t make sense it can’t be correct.

  6. I’m not sure that Tim’s explanation makes a lot of sense either but then it’s difficult to work out what the situation is.

  7. I think Osborne has hedged future *expected* reciepts based on some forward sales expectations. Should those not materialise then things can get ugly. Brexit crash story anyone?

    There is also the issue of funding these contracts in the short term as I doubt Barclays or whoever is in the other side of this deal wants to be owed tons of money by a wallpaper manufacturer. Mind you I don’t know much about commercial banking as what I touch is almost almost always collateralised.

  8. So was the company worried sterling was going to appreciate against the dollar, they must have bee listening to dodgy forecasts from the previous chancellor’s about the UK’s economic growth / or that the UK would not vote to leave the EU? Sadly from them his forecasts were wrong. If only the company directors had some way of contacting the ex chancellor to tell him of their displeasure. Maybe tonight at home, when he comes for tea?

  9. Andrew again. There is no risk to the bank, the risk lies with the company on the difference in exchange rates.

  10. Sadly the Times appears to have a standing requirement for 5 anti Brexit stories a day leaving the poor arts grads struggling to fit business ‘facts’ to the required narrative.

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