Ebury: How to Best Manage Foreign Investment Risk
Implementing the Digital Games Tax Offset will bolster Australia’s allure to the digital games industry and position the country as an attractive destination for foreign investment. This will also result in an increase in foreign currency funding, so developers must be prudent when dealing with the FX risk involved.
For example, the AUD/USD exchange rate fluctuated by 15% in 2022, which could mean a probable difference of AUD $150,000 for every AUD $1,000,000 repatriated.
Three key considerations for developers when dealing with FX risk.
1. Understand where your funds are coming from, set a budget rate, and find out how much foreign investment you need
To begin with, it’s essential to determine your budget rate, which is the rate at which you anticipate receiving foreign currency and converting it to Australian Dollars. In setting your budget rate, it’s crucial to take into account the current exchange rate, as well as recent highs and lows. Additionally, you should incorporate a buffer into your budget rate based on these figures. For instance, if the present exchange rate is 0.68, the 3-month high is 0.71, and the 3-month low is 0.66, you could set a budget rate of 0.71, assuming that the developer will close on financing within the next three months.
When determining the amount of foreign investment required, the two most important factors to consider are time and volatility. The length of time until contracting is completed and financing is secured is crucial, as is the potential impact of economic events on the currency market. Significant events like RBA meetings and inflation prints can have a substantial effect on currency market movements. To summarize, the longer the wait until closing, the greater the exposure to volatility, and the larger the buffer required.
2. Partner with a reliable FX partner that can help with your requirements
An FX partner is a financial institution that specializes in foreign exchange transactions and is typically not a bank. Their services usually include helping to structure the payment process, analyzing the appropriate budget rate, and providing advice on upcoming market-sensitive events that may affect the currency.
To manage foreign currency transactions effectively, having a draft finance plan is essential. This plan helps to determine how much AUD a developer requires from the incoming foreign currency, as well as identifying milestones and the duration for which the developer should hedge. Additionally, the draft plan may also provide insight into whether or not a client needs to hedge at all.
3. Have a hedging strategy in place to mitigate volatility
A developer employs a hedging or currency strategy to handle any foreign exchange risks that may arise. It’s essential for developers to consider how a currency movement against them could impact their project. For instance, if a 10% loss in investment funds occurs due to foreign exchange fluctuations, the developer must determine the implications. Will they need to reduce project costs to make up for the 10% funding gap? Will they be unable to complete the project? These are crucial questions that developers should be asking themselves. Hedging strategies need to be tailored specifically to what the developers’ needs are, which is where an FX partner can help. Ebury can arrange a free FX consultation for IGEA members and develop a strategy to help them mitigate FX risk as much as possible.
In conclusion, the implementation of the Digital Games Tax Offset in Australia presents significant opportunities for the digital games industry and foreign investment. However, developers must be aware of the FX risk involved when dealing with foreign currency funding. To manage this risk effectively, developers should set a budget rate, partner with a reliable FX partner such as Ebury, and have a hedging strategy in place to mitigate volatility. By being proactive and having a comprehensive plan, developers can ensure that they have the necessary funding and resources to complete their projects successfully, even in the face of foreign exchange fluctuations. Overall, careful management of FX risk is critical to the success of digital game developers operating in a global market.