The main disadvantage of making and accepting euro payments is that it exposes you to currency risks. If the exchange rate between sterling and the euro moves between the times when prices are set and when payment is made, you may lose out.
For example, if the euro weakens after an exporting business sets its euro prices, it will still receive the agreed number of euros but these will be worth less when converted into sterling.
Similarly, if the euro strengthens after an importer agrees the price in euros for a delivery of goods, the importer will need to use more sterling than expected to buy the euros he needs to make the payment.
This can work the other way - you may gain from favourable movements in the exchange rate. But these exchange rate changes are very unpredictable and it is wise to take steps to minimise your risks.
Hedging your currency risk
There are a number of ways you can counter your exposure to exchange rate risk, sometimes referred to as 'hedging' your currency risk:
- Ask your bank to open a euro bank account for you. This lets you make and accept euro payments without having to convert into sterling every time.
- Use a forward exchange contract, where you agree to buy or sell an agreed amount of foreign currency at a certain exchange rate by a specified date. These remove uncertainty by tying you in advance to an agreed exchange rate.
- Use currency options. These agreements are more expensive than forward exchange contracts but give you more flexibility by giving you the option, without the obligation, to buy or sell euros at an agreed exchange rate.
Read more about foreign currency and exchange risks.