Currency Hedging for Companies
Offense Is Sometimes the Best Defense
Currency hedging is a process designed to manage the degree of risk that may generate when engaging in foreign investment strategies. The main objective is to compensate for any shifts in the relative value of the currency type utilized in the investment scheme, for importers or exporters. This is done by minimizing the exposure of the investor to unfavorable shifts in the money market.
The use of currency hedging as a defense tool is a great way to keep the amount of loss at a minimum when dealing with international investment opportunities or when importing or exporting any good or service. By employing this approach, it is possible to entertain investment opportunities that would otherwise be considered too volatile for the investor to consider.
Volatility and variations in the exchange rates have always been of great concern for entrepreneurs around the world. Exchange rate variations and volatility can lead to great losses and in some extreme cases to bankruptcy. That’s why currency hedging has become an important component of financial and accounting planning. With currency hedging investors can fix an exchange rate at a present value for future operations in foreign currency, avoiding market fluctuations that could otherwise affect their income. The currency hedging provides them with the financial certainty which is needed to meet financial obligations in foreign currency.
The benefit of Currency Hedging
Any company with operations in foreign currency can benefit from Currency Hedging:
- By purchasing machinery or equipment abroad (importers)
- By selling goods and services abroad (exporters)
- By making overseas investments
Currency Hedging through the Foreign Exchange Market
There are several mechanisms by which you can hedge your currency exposure (futures, forwards, options, Foreign Exchange market, among others). One of the most cost-effective currency-hedging is through the Foreign Exchange market:
- Flexibility in amounts, terms and currencies
- Competitive initial and maintenance deposits
- Settlement by differential
- Deductible administrative and operational costs
- Possibility of settlement in advance without commissions
- Customized coverage
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