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To hedge or not to hedge, that is the question…

business-articlesTo hedge or not to hedge, that is the question…
Whether or not to hedge against foreign currency exposure is a question many SMEs ask themselves.
But what does hedging actually involve? And how easy is it to implement?


Why hedge?


The currency market is always moving, and the objective of hedging is to ensure you’re protected against major shifts in exchange rates.

The last few years have shown just how volatile the currency market can be, with the fallouts from situations like the EU referendum triggering huge swings in the major currency pairs.

Movement of up to 5% in a month is not uncommon, and within the last 12 months the GBP/EUR exchange rate has fluctuated by around 7 cents.

Shifts of this size can have a significant impact on your international payments, and by choosing not to hedge you’re leaving your company exposed to the risk that the market might move against you.

Conversely, by choosing to hedge all of your exposure you could miss out on the benefits if the market suddenly moves in your favour.

An effective hedging strategy doesn’t eliminate all risk but balances security with opportunity, giving you control over the extent of your exposure.


Flexible tools


There are a number of tools to choose from, and you even have the option to use products in combination to create a bespoke hedging strategy depending on your depending on your objectives, financial standing and risk appetite.  

A forward contract is one example of a hedging product. This straightforward contract offers the ability to exchange two designated currencies on a future date at a fixed exchange rate, providing predictable cash flow.

Fixing a rate in this way means that, while you’ll miss out if the exchange rate improves, your funds will be protected if the rate suddenly weakens. Knowing exactly how much a future transfer is worth also helps when it comes to producing accurate forecasts and projections.

Forward contracts are available for all major currencies and can be tailored to give the user the flexibility to draw down on funds or extend expiry dates depending on their needs.


Protect against risk and maximise opportunity


Every business is different, and so are their international payments.

When it comes to identifying exposure and protecting profit, a one-size fits all approach just won’t work. That’s why we’ve developed a personalised 4 step approach to help businesses achieve more predicable cash flow and mitigate currency risks.
 
  1. Identify: Identify your exposure to currency market movement by reviewing the size and frequency of your overseas transactions and potential impact on cash flow.
 
  1. Objectives: Combine knowledge of your exposure and cash flow sensitivity with our market outlook to determine your risk management objectives.
 
  1. Strategy: Develop a strategy with our industry experts, selecting the right tools to help you achieve your objectives and protect profit.
 
  1. Execute: We’ll help you execute your plan, and keep you up to date with market insight and regular performance evaluations.
 
If your company is currently exposed to currency risk and you’d like to find out more about the options open to your business, give our team a call on +44 20 7847 9400.  
 
 

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