COVID-19 created a significant shift in how businesses operate, mainly how they hire, onboard, and engage their employees. The days at the proverbial “water cooler” have been replaced with a disparate workforce gathering on Zoom to discuss supply chain issues. While some business leaders have advocated for a “return to the office,” most company executives realize that remote work is here to stay.

For those organizations that have embraced the “new normal” of a work-from-home environment, the pool of potential new hires has widened. No longer confined to a specific city, state, or region, US companies are hiring employees from all over the globe. And, while there are challenges such as ongoing compliance, technology gaps, and currency volatility, the business impact is positive.

Unfortunately, when it comes to currency volatility, companies are overlooking potential risks. Consider earlier this month when a once-in-a-generation moment occurred: the Euro and the US dollar reached parity. The last time the two currencies were of equal value was in 2002, 20 years ago. Or, the Israeli shekel plummeted by nearly 9%, falling from its 20-year high.

See a pattern yet? How can companies paying workers overseas ensure they do not lose a significant share of revenue to payroll costs? What Does Currency Volatility Mean for Global Payroll?

Foreign exchange volatility is an ongoing challenge for companies with a global presence and an international workforce. 

Why?

Because while a company might generate revenue in US dollars, their payroll cost, if it’s in Israel, might be in shekels. If your sales are in dollars, you don’t know what that translates into in shekels until you transfer funds from one currency to another or vice versa.

Case Study: Layered Hedging 101

Hedging is a financial tool that helps mitigate the monetary extremes caused by market fluctuations. It allows a company to lock in an exchange rate at historically very high levels and secures that for three, six, nine, or 12 months. And once complete, the company knows that the cross-border payroll that comes in for the next 3-12 months to the amounts they have hedged have been locked in, and they will be getting top pounds, euros, or shekels for those dollars.

The most basic way to hedge is what’s known as a layered hedging strategy. A layered hedging strategy is like an insurance policy. Imagine living in a flood-prone area. You can’t prevent the flood (i.e., natural volatility), but you can pay a monthly fee to ensure against it. If the flood never comes, the homeowner “loses” because there’s no payout. But by the same token, their “loss” is a “budgeable” manageable expense.  

Now, in returning to the euro or the shekel, the analogous risk is that if the euro or shekel continues to depreciate or the dollar continues to appreciate, what ends up happening is you’ve lost out on potentially taking advantage of more favorable market movements. The upside is if you’re able to pick the top of the market, which is very difficult, then you’ve got the top dollar. Layered hedging locks in a price point somewhere between those extremes.

Another advantage of layered hedging is that you don’t have to lock in a rate all at once; hedging can be done in tranches. Likewise, hedging is generally helpful when it comes to invoicing and budgeting. When an invoice is due, say 30 days out, a fixed currency exchange ensures you don’t end up paying more than what was billed in the original currency when adjusted for an exchange rate change.

To highlight the details above, Worldesk recently worked with a company paying their IT staff in Israel. The company was able to lock in its shekel rate at 3.5, a historically high level. By determining their annual need ($1 million budget), we designed a layered hedging strategy that hedged their currency structure on a sliding scale (80% in the first quarter, 60% in the second, and so on) to take advantage of market movements, but also not hedging the entire budget

completely.

Worldesk Wizardry Creates Currency Market Opportunities

At  Worldesk , a leading fintech solution for currency management and automation, we successfully helped businesses of all kinds navigate a volatile international marketplace. With full transparency and all the tools at your disposal, Worldesk is a trusted provider of software that helps companies manage and automate their international transactions.

Offered as a desktop or mobile software, Worldesk allows users to lock in a rate or set up real- time alerts in the system. Hence, exchange rates become advantageous, a user can lock in a favorable rate, and the transfer of currency is seamless.  

While currency experts on the Worldesk team can still perform the vital function of dispensing timely advice and creating an intelligent plan for managing your currency exposure, the key difference is time and speed. With Worldesk, users set their hedging parameters, and the software does the rest. In other words, a “set it it and forget it” approach to currency management. 

How Can Worldesk Assist Your Global Payroll Need?

For today’s businesses with an overseas workforce, combined with critical staffing and resource shortages, getting the most bang for the proverbial buck — or savings for every pound, euro, and shekel — is more critical than ever.

Because while Euro and USD parity might be an incredible once-in-a-generation experience, for now, market volatility could become the new normal in the decades ahead. Consider that a prediction you can take to the bank.

Contact the team at Worldesk via phone at 212-884-9912 or email at [email protected].