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3 pillars of a good hedging strategy

business-articles3 pillars of a good hedging strategy
Hedging, the strategic use of financial instruments to offset the risk of market movement, isn’t the right course of action for every business.

But for businesses exposed to the volatility of the currency market, hedging can help you strike the right balance between risk and opportunity.

Hedging all your currency exposure means you could miss out on the positive impact of a sudden upswing in exchange rates, but by not hedging at all you run the risk of losing out if the market suddenly moves against you.

Swapping unpredictability for reliability also makes it easier to budget effectively and produce more accurate cost projections.

But what are the three pillars of a good hedging strategy?

Identify

Before you take any action, it’s imperative to identify the extent of your company’s exposure to currency market movement.

You can do this by reviewing the size and frequency of your overseas transactions. Are you paying for imports on a monthly basis? Or do you make larger payments on a more sporadic basis? Do you pay overseas staff in foreign currencies? 

By assessing the value and extent of your international transfers you can establish the potential impact of exchange rate shifts on your cash flow and define your objectives – what do you want to get out of your hedging strategy? What are your risk management goals?

Strategy

Once you’ve identified your objectives and what you hope to achieve, you can discuss your business requirements with industry experts.
Talking through the various options will help you ascertain how much of your exposure you want to hedge and which tools are best suited to achieving your goals and protecting your profit.
Once all the ins and outs have been established, you’ll be ready to execute your strategy.

Review


Situations change, so once you’ve implemented your strategy it needs to be monitored closely and reassessed on a periodic basis to make sure it’s performing optimally.

As well as helping you develop and execute your strategy, our teams here at Currencies Direct are on hand to keep you up-to-date with the latest currency trends and exchange rate movements so you have access to all the insights you need to make informed decisions.

As stated by our Chief Analyst Phil McHugh; ‘Having easy access to regular currency forecasts is important if you want to be able to estimate how exchange rates might move in the future.

The currency market is notoriously unpredictable, but having an awareness of events that can impact exchange rates and tracking the latest currency trends gives you the ability to plan your currency transfers for the right time and (if appropriate) reconsider your hedging strategy.’  

While engaging in international currency transfers will always carry an element of risk, identifying your exposure, determining your risk-management objectives and having access to the right support can make a big difference.

If your company is currently exposed to currency risk and you’d like to find out more about the options open to you, give our team a call on +44 20 7847 9400.
 

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