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How to hedge foreign exchange risk?

22 April 2022

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Now more than ever, FX market volatility represents a threat to your profit margins. Prices negotiated in a foreign currency, delays between invoicing and payment, as well as the repatriation of foreign currencies are just a few examples of why you and your business may be concerned about significant exchange rate fluctuations.

Better anticipating these fluctuations and securing your company’s margins is possible thanks to hedging instruments. Large multinationals are all too aware of this and know how to take advantage of these strategies. But are you? At iBanFirst, we believe that all companies deserve the same quality of service that is generally reserved to multinational corporations. That is why we offer a comprehensive range of currency hedging solutions to protect your profit margins and improve the precision of your budgets.

What is hedging?

In finance, hedging refers to minimizing risk by offsetting exposure. It aims to decrease possible losses. Budgetary concerns affect all businesses, and hedging solutions are just one way you can alleviate such pressures. Global research firms like Gartner have reported on finance professionals’ increasing interest in reducing margin erosion. This issue was listed as one of 2019’s top challenges in the firm’s recent priority poll.

If your company has operations or subsidiaries abroad, or if your business engages in procurement or sales through foreign currencies, then this is one angle you should really consider.


Why hedge?

Hedging currency risk provides an international company a number of advantages including
- Limiting losses
- Increasing liquidity
- Overcoming difficult market periods
- Saving time by not having to monitor the market daily

What are the different types of hedging instruments?

here are a number of options for CFOs and business owners wishing to lessen the constraints and challenges they find themselves up against when dealing in foreign currencies:
• With a forward contract, for instance, you can freeze the amount of an invoice denominated in a foreign currency, therefore protecting margins and preserving cash flow.
• Flexible forwards are another solution to consider, as they allow you to keep a foreign currency reserve at a fixed exchange rate for up to 24 months.
• Businesses can also make use of dynamic forwards, which completely neutralise foreign exchange risk and offer the possibility of capitalising on opportune movements on the currency market.
• Money markets are another option and involve lending and borrowing simultaneously in two different currencies to lock in the home currency value of a currency transaction.

Multinationals should not be the only ones to take advantage of hedging strategies. Small and medium international companies can also greatly improve their currency risk management practices by implementing a clear hedging strategy. Our four steps to establish an effective hedging strategy will help you better understand your company’s specific foreign currency needs and how to address them.

 

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