Warren Smith Ski Academy sells ski courses to clients in the UK and pays for them in mainland Europe, which means it collects pounds and spends euros and Swiss francs. Working with our desk since 2019, the academy fixes the euro side of a season in advance using forward contracts, and works its Swiss franc requirement with standing market orders. This is an account of how that approach held through 2022, the most volatile year for sterling in a decade. Medlock & Thames is a currency broker, so this describes what happened rather than what any other business should do. The academy's own figures are its business, so what follows describes the approach and uses published market rates rather than contract detail.
What is the exposure?
The academy runs five day courses and instructor training in Cervinia in Italy, priced and paid in euros, and seasonal courses, instructor programmes and a summer bike academy in Verbier in Switzerland, priced and paid in Swiss francs. It also runs indoor days at UK venues in Hemel Hempstead and Manchester. The revenue is largely sterling, because the clients are largely British. So the business earns in one currency and pays accommodation, lift passes, instructor fees and local suppliers in two others. The mismatch is structural. It happens every season, and it is known about months in advance, which is exactly the profile that makes a currency exposure manageable.
Why was 2022 a difficult year to leave unhedged?
Because sterling moved a long way, quickly, and against a business buying euros. Using the euro reference rates published daily by the European Central Bank, the pound bought 1.1964 euros on 28 July 2022. Nine weeks later, on 28 September 2022, it bought 1.1078, a fall of about 7.4%. The Swiss franc leg moved further: sterling bought 1.1659 francs on 28 July 2022 and 1.0454 on 28 September, a fall of about 10.3%. For a business that had already published course prices in pounds for the coming winter, a move of that size lands entirely on the margin, because the selling price is fixed and the cost base is not.
What did the academy do about the euro costs?
It fixed them before the season started, using forward contracts. A forward contract lets a buyer agree today's rate for a payment on a future date, usually up to two years ahead, in return for a deposit, with the balance due when the contract matures. Ahead of the 2022/23 winter the academy booked cover during the summer, while sterling was still trading near the top of its range for the year, rather than converting month by month as the bills arrived. From that point the euro cost of the season was a fixed number in the budget rather than a moving one.
What difference does fixing the rate ahead of a season make?
It can be measured against what the market went on to do. Across the 2022/23 season, from 1 November 2022 to 28 April 2023, the ECB reference rate for sterling against the euro averaged 1.1390. Buying euros at that average rather than at the 1.1964 available on 28 July 2022 costs about 5 per cent more sterling for exactly the same euros. Buying them on the worst day of the period, 1.1078 on 28 September 2022, costs about 8% more. On a seasonal euro budget running to six figures, that is a five figure difference, and it falls straight onto the margin of a business whose selling prices were published months earlier.
It is worth being precise about what a forward does and does not do. It did not predict the fall. It removed the question. Had sterling risen through the winter instead, the same contracts would have left the academy paying above the market, which is the trade every hedger accepts in exchange for certainty. We set out both sides of it in forward contracts and currency options compared.
How are the Swiss franc costs handled?
Differently, because the requirement is less predictable. Verbier spending arrives across the season rather than in a single block, so instead of fixing it all forward the academy uses market orders. A market order is a standing instruction left with the desk to convert automatically if the market reaches a level the client has specified, which means nobody has to watch a screen to catch it. That suits a recovery, because recoveries tend to happen in a hurry. Sterling bottomed against the franc at 1.0454 on 28 September 2022 and by the end of January 2023 was trading back above 1.14, a move of roughly 9% that would have been easy to miss while running a ski season.
Why use two different tools?
Because the two exposures behave differently. The euro course costs are known in size and date, which suits a forward contract: fix the number, put it in the budget, move on. The Swiss franc requirement is a rolling operational spend where the timing is flexible, which suits a market order, since the flexibility can be used to wait for a level rather than converting on whatever day the money happens to be needed. Most businesses with more than one currency end up with more than one approach. Our guide to FX hedging for finance directors sets out how the choice is usually framed.
What does the client say?
As a business operating within mainland Europe and the UK, the volatility within the currency markets over the past 5 years has had a big impact on our bottom line. The team at Medlock & Thames is the same team we have used throughout this period and their hedging products, combined with competitive exchange rates, has enabled us to minimise our risk during these turbulent times. Warren, Founder, Warren Smith Ski Academy.
The line worth noticing is the same team. Continuity is doing real work here: a dealer who already knows that the euro costs land before the season and the franc costs land through it does not need the position explaining every time the market moves.
According to Medlock & Thames
In our experience, seasonal businesses are the ones most exposed to a currency move and the ones least likely to have planned for it, because the exposure only feels urgent for a few weeks a year. The pattern we see on the desk is that the businesses which cope best are not the ones with the most sophisticated hedging, they are the ones that fix their currency costs at the same moment they set their selling prices. Once a price list is published, the margin is only as protected as the cost base underneath it, and that is a decision with a deadline attached whether or not anyone treats it as one.
Frequently asked questions
What size of business does this apply to?
Any business with a foreign currency cost it can see coming. The mechanics are identical at 20,000 pounds or at two million. What matters is whether the exposure is known in advance, not how large it is.
Does a forward contract require the full amount up front?
No. A forward is secured with a deposit, with the balance due when the contract matures. The deposit varies with the currency pair and the length of the contract, and if the market moves against the position before maturity a top up can be requested. That is a cash flow consideration worth understanding before booking one.
What if the euro requirement turns out smaller than expected?
A forward is a commitment to exchange, so an over hedge has to be dealt with rather than ignored. In practice this is why most businesses fix a proportion of a forecast rather than the whole of it, and why the desk would rather understand the range of possible outcomes than take a single number at face value.
Is a market order guaranteed to fill?
No. A market order only converts if the market trades at the level specified. If it never reaches that level, nothing happens and the requirement still has to be met at whatever rate applies on the day. That is why market orders tend to be used for flexible spending rather than for a payment with a fixed deadline.
How is the money protected?
The transaction is carried out by an FCA authorised institution, which is required to safeguard customer funds by keeping them separate from its own. The Financial Services Compensation Scheme does not cover payment services or electronic money, so the protection comes from safeguarding rather than the FSCS. We explain the full chain in safeguarding explained.
Related articles
This story is part of our client stories series. For the personal equivalent, read buying a Florida property. For the underlying mechanics see FX hedging for finance directors, forward contracts and currency options compared and IFRS 9 hedge accounting explained. If your business carries a similar exposure, see corporate currency, and if seasonal cash flow is part of the picture, business finance and currency.
This case study may not be indicative of all customers. Results may vary, and customers agree to proceed at their own risk. Medlock & Thames is a currency broker and does not provide regulated financial advice. Published with the client's permission.
