FX Hedging: Understanding Foreign Currency Risks

FX Hedging: Understanding Foreign Currency Risks

Navigating the cross-border payments market can be a tricky business. That's why we've put together this helpful guide on implementing a proactive and strategic FX hedging strategy.

Understanding Foreign Currency Risks

While operating in a cross-border market already comes with its own set of operational challenges, ineffectively navigating foreign currency exposure can take your risk over the edge leading to direct impacts on your firm’s bottom line. With markets ever-changing, businesses must rethink their international operations and implement a proactive and strategic approach to their international payment needs. 

What is currency hedging?

While some exposure to market fluctuations should be expected when dealing with foreign currency, businesses can offset these risks by having a proactive FX hedging strategy in place. FX Hedging acts as protection on trade prices and can reduce the uncertainty of exchanges, regardless of variations that may occur in the market. 

As an example, imagine a U.S. company that imports goods from France. Naturally, the cost of goods would be denominated in the French currency, the euro or EUR. Because of this, the U.S. company is subject to risks associated with fluctuating exchange rates between the two separate currencies. If by chance, the dollar devalues against the euro then the cost of the goods would end up being more than the original costs. On the contrary, if the euro devalues against the dollar, the cost of goods would be less in terms of USD. 

Points of Exposure to be Aware of

Understanding when and where your exposure to market fluctuations are is essential to establishing a risk management strategy in line with your business goals. That’s why we’ve compiled a list of the top points of risks your business needs to be aware of.  

Overseas Purchases

While some overseas companies may invoice in dollars, there’s no guarantee that the suppliers will and with the possibility of an added margin invoiced in foreign currency, the actual costs between the time of quote and payment can drastically change. 

Exports

While global expansion has the opportunity to rapidly increase firm revenue, fluctuations in the currency market can still have a direct impact on profitability, despite the improved sales volume. 

Multicurrency Operations

With multicurrency transactions adding further complexity to international operations, your risk of exposure to foreign currency fluctuations increases. Add on top of that the resource costs that may be incurred from administering multi-currency operations and the pressure on your margin soars. 

International Partners

International partnerships offer a multitude of advantages to firms with access to local market knowledge and contracts set at number one. But, as with any international operation, understanding the associated risks is necessary. With these partnerships, any costs paid in foreign currency are subject to market volatility, meaning forecasting margin impacts may be difficult.  

Overseas Offices

While geographic expansion may up the value of the firm, the FX risks associated with operating payroll and office costs are not to be considered lightly. Sudden changes in currency values mean that impacts on profitability and bottom line are expected, especially without a risk management strategy in place. 

Supply Chain Costs

The complexity of supply chain operations generates major currency risk, especially if logistics costs are incurred in more than one currency. Because the location and nature of supply chains may vary, final purchasing and service costs depend entirely on market currency fluctuations.

Hedging Strategies to Consider 

Forwards

If you’re looking to maintain some sense of budget certainty for the future then forward contracts may be for you. These contracts allow you to fix a prevailing rate for a set period which can allow you to more accurately forecast international costs. 

Options

When looking to hedge against any uncertain FX cash flows, options are usually the way to go. FX options give you the ability to buy or sell at a pre-agreed upon exchange rate on or before a specific expiration date. 

Orders 

If you’re looking to make a payment with no immediate urgency then FX orders are ideal. These types of orders allow you to buy currency at a set exchange rate of your choosing. 

How Moneycorp Can Help

The COVID-19 pandemic and resulting economic uncertainty have had a profound impact on the global markets, leading to greater uncertainty around currency volatility. And, with businesses finding it harder to accurately forecast amid changing markets, pressure to protect the bottom line is at an all-time high.  That’s where moneycorp comes in. With a free currency audit from expert FX exchange dealers, you can view your current risk and assess your future exposure. Our FX currency risk report includes:

  • An overview of your currency fluctuations against the dollar for markets relevant to your business
  • Estimated costs and potential savings for future international payments

Speak to a member of the moneycorp team to learn how you can better mitigate your currency risk today. 

Why use moneycorp?

Bank beating exchange rates

Bank beating exchange rates

Fast money transfers 24/7

Fast money transfers 24/7

Safeguarded customer funds

Safeguarded customer funds

Free expert guidance

Free expert guidance

You may also like:

Taking the First Steps with Hedging

Taking the First Steps with Hedging

In this blog, we’ll talk about the necessary steps you must take to help mitigate the various risks your business is sure to face when dealing with foreign currency exchange.  

Read More
How APIs Are Disrupting the Payments Industry

How APIs Are Disrupting the Payments Industry

Read our blog to understand why the rise of payments technologies, particularly through APIs, are promising faster, easier, and more transparent transactions, resulting in positive disruption that companies are now embracing. 

Read More
The Loonie and Oil: Expectations Vs. Reality

The Loonie and Oil: Expectations Vs. Reality

In this blog, we take a closer look at the truth about oil and its relationship to the loonie. 

Read More