Limit orders and stop-loss orders

When a transfer doesn’t need to be made imminently, limit orders and stop-loss orders are ideal for setting parameters for managing currency risk. They allow companies to specify the highest and lowest exchange rate levels at which it is willing to execute a transaction, and therefore determine the range of funds to be paid or received. Let’s take a closer look at both options. 

What are limit orders? 

Limit orders allow you to choose the exchange rate you want, and if it is met the company will transfer your money. This may be beneficial to your company if you have a large sum of money to transfer but you don’t need to make the transfer immediately, or you are predicting the exchange rate might move in your favour. However, in some cases, limit orders may expire if they aren’t met, so they might not be a good option for a transfer that needs to be made in the short term. 

What are stop-loss orders? 

On the other hand, stop-loss orders allow you to arrange a payment for a future date, but if the exchange rate falls to a certain value, you agree for them to send you money earlier. In the event the local economy sees a downturn, this would allow a business owner to ensure they can guarantee an exchange rate, meaning they won’t have to pay more than a certain value to exchange funds. 

Businesses can have a combination of limit orders and stop-loss orders in order to ensure that they are stabilising their costs for international money transfers. Let’s look at an example of how this might work below.

Case study: Buying commercial property overseas on a flexible timeline

limit-orders-stop-losses.jpg

Business issue: Locking in a minimum and maximum exchange rate for future payments or receipts

Business goal: Using both limit orders and stop-loss orders to ensure the transaction occurred within a defined price range 

Biltong Chew Industries (BCI), a South African business, was planning to set up a new distribution centre outside Barcelona, having rented space for their Spanish employees for over a year. 

BCI had set aside 12m rand (ZAR) for the purchase of this property, but since they still had a lease on the rental space, they did not want to make an immediate purchase of a new property and have one of the spaces lie empty, so they decided to wait before making the transaction.

At the time, the exchange rate was 8.765 ZAR for each euro (EUR). Aware that the rate might move in the other direction, BCI arranged a limit order, which allowed them to buy EUR when the exchange rate reached a level they were comfortable with. They also arranged a stop-loss order that would prevent them from losing money if the rate moved in the opposite direction.

BCI placed a limit order to make the currency exchange at a rate of 8.630. If this rate was reached, BCI’s 12m ZAR would automatically be exchanged into EUR. This is the best-case scenario for BCI.

A stop-loss order was also placed at a rate of 8.850. To prevent BCI from having to pay too much on the transaction, if this rate is reached, the 12m ZAR would be exchanged for EUR automatically.

By setting these two limits, BCI established a certain level of predictability, since they guaranteed the minimum and maximum amounts they would pay on this transfer. If the exchange was made at the stop-loss rate of 8.850, BCI would have received €1,355,932. In the end, the exchange was made at a limit rate of 8.630, so BCI’s 12m ZAR was worth €1,390,498 when the transaction was made.

Where can I find out more about limit orders and stop losses?

To find a provider who offers stop-loss and limit orders, simply conduct a comparison search on our site and then select a broker that deals in the two currencies you wish to manage. Typically, the online-only providers do not offer these products.

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