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iBanFirst: Implementing an effective currency hedging strategy

iBanFirst: Implementing an effective currency hedging strategy | Fintech Finance

By Vivek Savani, Executive Director, iBanFirst UK

While company risk management strategies will vary, every company is susceptible to currency exchange rates in one way or another. For businesses to reduce their risk and overheads around FX, businesses must start by dividing and listing their assets. This will allow them to create a budget forecast and assess their exposure to risk and change within foreign currency markets.

Once foreign exchange risk exposures are identified, choosing a hedging strategy based on desirable outcomes is the next step. This could include, but is not limited to, immediately locking in the exchange rate of foreign currency transactions or locking in the exchange rates of a portion of the transaction. The former would involve a systematic risk hedging strategy and the latter would suit a selective risk hedging strategy. Making sure your strategy is tailored to your business is imperative.

Another key step is to choose the right products to support your business. There are many financial products available to support hedging, choosing the right one to fit your businesses needs will depend on a few key factors: Your risk appetite, your available cash flow, your price budget, but also your exchange rate policy. Companies wishing not to lock in transactions at a set exchange rate are more likely to benefit from the leeway of flexible or dynamic forward contracts, whilst companies wishing to lock in are more likely to favour traditional forward contracts.

Keeping a close eye on your strategy and its exposures will allow you to remain open to reassess on a pragmatic and informative basis. This will keep your company’s hedging strategy current and allow you to adjust and future forecast along the way. Regular monitoring and management of risk strategies as businesses evolve is crucial to the success of an effective currency hedging strategy.

To put it simply, there are 4 main stages of a good hedging strategy. Take stock of your international financial situation, choose the strategy best adapted to your company and identify the corresponding financial products, and finally monitor your strategy to modify it if necessary.

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