Welcome to In Focus, foreign exchange insight from HiFX to support businesses that send or receive international payments.
For more information about how businesses can mitigate the risks of foreign exchange exposure , download our new currency risk whitepaper.
Many businesses aren’t aware of the full range of foreign exchange risk management options available to them. They may think, for example, that anything other than buying the required currencies at today’s rates is getting into the realms of currency market speculation.
However, an alternative way to think of hedging is as an insurance policy. The goal isn’t to second-guess how the market might move, but simply to obtain protection in case the market happens to move against you.
We’ve taken a look at what hedging tools are available and some areas to consider when determining the right approach for your business.
What hedging tools are available?
There are a variety of hedging tools that you can use to insure your business against the possibility of adverse rate movements and they all work slightly differently.
A forward contract is perhaps one of the simplest approaches. With these transactions, you arrange to buy a certain amount of currency at a set price in the future. For example, a chain of grocers might be due to pay a €10,000 bill to an overseas supplier next month. They can arrange a forward contract today to secure the exchange rate, so they know exactly how much they will have to pay when they settle the invoice. This means they don’t need to worry about currency fluctuations in the following weeks.
It may turn out that the exchange rates don’t change, or Sterling increases against the Euro during this timeframe. In this situation, hedging might feel unnecessary. However, this is returning to a mindset of seeing hedging as a way to beat the market rather than as an insurance policy. You don’t, for example, rue having paid for home insurance when you get to the end of the year without your house having burned down.
More sophisticated hedging tools such as FX Options and Structured FX Products* are also available. These are designed to provide businesses with protection from adverse rate movements in a range of different scenarios, but they also carry a high degree of risk and they may not be suitable for everyone.
Should your business be hedging?
Hedging is not the right strategy for all businesses. It will depend on a range of factors, such as your attitude to risk, how much visibility you have over future foreign currency requirements and the size of your exposure to foreign exchange risk.
But, in an increasingly uncertain world, you might find that hedging could help to protect your business from adverse exchange rate movements and give you peace of mind.
If you’d like to discuss your business’ situation in more detail, please call our Corporate Team on +44 (0) 1753 752 626.
For more information about how your business could mitigate the risks of foreign exchange exposure, download our new currency risk whitepaper.
*Our FX Options and Structured FX Products and Advisory Services are provided by HiFM Limited. Trading in derivative products carries a high degree of risk and may not be suitable for everyone. The services provided by HiFM Limited are not available to retail clients. HiFM Limited is authorised and regulated by the Financial Conduct Authority, registration 446302. HiFM Limited is a limited company registered in England and Wales. Registered number: 5448864. Registered office: Maxis 1, Western Road, Bracknell, Berkshire RG12 1RT.
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