Foreign exchange risk management

Why Hedging matters

We live in an age of political and economic uncertainty. Changing trade relationships, the pandemic and a shifting political landscape have led to frequent and often dramatic – swings in currency value. For many businesses, there is great value in mitigating their exposure to these risks.

If your business works to budgeted rates, hedging can insure you against margin erosion. When you work on tight margins it can even make the difference between a profit and a loss. A quick glance at the GBPUSD exchange rate since May 2016 shows just how quickly the market can move.

Between June 2016 and January 2017 GBPUSD fell from 1.4840 to 1.2040 a fall of 19% in just over 6 months.

As we enter the last quarter of the Brexit process it is increasingly clear that the future of the UK’s economic health and its entire trading dynamic increasingly hangs in the balance. Now, as in 2016, it is vital that businesses take a measured approach to managing these risks.

Risk Management with Forward Contracts

Financial markets are volatile and even the major international currencies have seen some eye-watering movements in recent years. If your business is exposed to these fluctuations, a move in the markets could wipe out profits overnight.

The solution is to hedge your risk with Forward Contracts. Banks may limit the options available to businesses because of the difficulty assessing risk. At Fintuitive we take the time to get to know our clients, meaning we can arrange precisely the best deal for you at any given time where available.

How does it work?

That depends on your appetite for risk. The most risk-averse businesses hedge their entire FX exposure, locking in a set rate for up to three years. This provides certainty for budgeting and peace of mind but means that if markets move in your favour you can’t take advantage.

Most businesses typically hedge a percentage of their FX exposure, so when they need to exchange currency they can either draw on their Forward Contract or opt for a spot transaction at the current rate.

You can also layer Forward Contracts, meaning you make a series of purchases at different rates, thereby reducing risk.

Fixed or open forwards?

There are two main options at your disposal.

  • Fixed Forwards offer an iron-clad rate for currency exchanges set on a specific date. What you gain in a cheaper deal is counterbalanced by a lack of flexibility,
  • Open Window Forwards are the most popular version because businesses can vary the time and amounts involved in the transaction. With an open window you can draw down any amount at any time, up to the total value of your contract.

Bespoke hedging policies and strategies

You can  layer Forward Contracts, meaning that you have more hedging for short term exposure than long term. This keeps a consistent approach to reducing risk. As each quarter or month passes  you lock in agreed hedging percentages for the next timeframe, smoothing the effect of volatility and reducing your exposure to market shocks.

A simple example of how this could work is below

Hedging 1st of Jan 2018
Period Amount hedged
Q1 100%
Q2 75%
Q3 50%
Q4 25%
Hedging 1st of April 2018
Period Amount hedged
Q2 100%
Q3 75%
Q4 50%
Q1 19 25%

 

A proactive approach

We can help you take an active approach to managing forward risks either through rate alerts, market orders or dynamic hedging strategies, giving you an edge and helping you actively manage your risk exposure allowing you to get on with your day to day business.

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