Currency risk hedging
Are your business results dependent on exchange rate developments? When you do business outside the eurozone, you are likely exposed to currency risk. You face currency risk because exchange rates for future receipts or payments in foreign currency are constantly changing.
Strategy
Smart strategies with forward contracts
Suppose your company imports a product and pays for it in US dollars. You then sell this product for euros. Every time you import this product, the exchange rate is different. This means the amount your company pays in euros changes every time. Do you have fixed price agreements in dollars and fixed selling prices in euros? Then your gross margin is directly dependent on the exchange rate. This can be prevented!
Why?
Why hedge currency risk?
Foreign currency trading takes place 5 days a week, 24 hours a day. Exchange rates are determined by changes in supply and demand. News, economic data and changes in central bank policy all influence exchange rates. This is a continuous process and the reason why exchange rates change every second. The currency market has many technical and fundamental analysts. They try to predict exchange rates based on macroeconomic data, expectations regarding central bank policy and charts. However, nobody has a crystal ball. The exchange rate at the moment of conversion is what matters most to your business. Every other rate is irrelevant.
Your options
Three strategies for currency risk
Choose the strategy that best fits your business situation.
Fixed forward contract
With a forward contract you lock in the exchange rate now for exchanging two currencies at a date in the future. When you enter into the forward contract, you know exactly how much you will pay in euros for the purchase of foreign currency on the agreed future date. How the exchange rate develops in the interim period is now irrelevant.
Flexible forward contract
Do you receive or pay irregular and varying amounts in foreign currency? Then a flexible forward contract is ideal. You also lock in the forward rate for a specific period and amount. Your company can make interim drawdowns: exchanging part of the total amount at the locked-in forward rate at an earlier time.
NOT hedging currency risk?
Nobody has a crystal ball and can predict the exchange rate for a specific date. Currency risk policy should be aimed at preventing conscious or unconscious speculation. Hedging currency risk leads to certainty and safeguarding your company's margin from exchange rate changes.
Risks
Risks for your business
Using forward contracts is often seen as speculation, but the opposite is true. The question you should ask is not whether it was the right decision in hindsight to hedge or not, but: what risk does the future business result face if you do not hedge the currency risk? Exchange rates can sometimes be out of alignment for months or years and not return to a level that is favourable for your business. A currency risk policy prevents this problem and leads to stable business operations.
We help
ValutaPartners helps businesses
Analyse and quantify
ValutaPartners helps businesses analyse and quantify currency risks. A solid currency management policy helps with budgeting and pricing and leads to business results that are independent of fluctuations in the currency market.
Experience from the City of London
The experience of co-founder Michiel Souren on both the bank and client side in the City of London provided a wealth of knowledge and experience. He gained insight into how banks profit from their clients. But also how to prevent this. In addition, he learned how large multinationals deal with currency risk. He wants to share this experience with the Dutch business community.
Is it time for your business to adopt a currency risk policy?
It is crucial for your business to have a currency risk policy in place. We are happy to help you get started.