Currency hedging and FX risk management for business
Protect your profits from market volatility and limit your currency exposure with our range of FX hedging tools and options
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What is a currency risk management strategy?
Currency risk management strategies are a set of procedures that allow businesses to mitigate the effects of currency fluctuations. Financial derivatives are commonly used to manage exposure to currency fluctuations. These currency hedging instruments include forward contracts, foreign currency options and money market hedges.
Currency forward contracts are a simple example of foreign exchange risk management in action: they are legal contracts to buy a specified amount of currency at a fixed foreign currency exchange rate. This offers protection from movements in the currencies’ future spot rates; it also enables individuals and businesses to plan a budget by knowing exactly how much of a given currency will be leaving their accounts.
Why would your business need a risk management strategy?
An FX risk management strategy could help you limit your currency exposure and protect your profits.
All major currencies—whether due to politics, economics or other external factors—will fluctuate against each other. Whether your organisation is an importer of goods from abroad, regularly receives payment in foreign currencies or relies on paying international staff in local currency, international payments increase your exposure to ever-fluctuating exchange rates.
These sudden exchange rate shifts can affect the value you receive when exchanging currency, which creates financial risk and makes it difficult to forecast costs and income. By adopting a foreign exchange hedging strategy, businesses are given the certainty of knowing exactly how much they’ll have to pay for various items and receive protection from potentially heavy losses.
Protect your company and preserve profits with a foreign currency risk management strategy
We are here to help businesses keep an eye on risks and spot opportunities associated with the financial markets and help them plan ahead as the world eases out of Covid-19 restrictions, as well as find their feet in a post-Brexit landscape.
Moneycorp offers a wide range of currency hedging solutions to help protect your business from unwanted exchange rate movements, from the most basic, low-risk strategies to more complex approaches that may give you the opportunity to out-perform current market rates.
Moneycorp’s FX hedging solutions
Forward Contract
A forward contract allows you to buy currency on an agreed future date at a pre-fixed rate. This may require a deposit and allows you to lock in a rate for up to two years.
Forward contracts tend to be used by businesses that trade internationally or use foreign currency to pay suppliers, as it allows them to manage their exposure and forecast their expenses and income with greater accuracy.
FX Orders
If you need a particular exchange rate but have no urgency to purchase straight away, an FX order could help you secure a better deal.
FX orders include three types of orders: limit orders, stop loss orders and One-Cancels-the-Other orders. Limit orders are used to buy currency at a specified price or higher; stop loss orders, on the other hand, are used to trigger the purchase of currency once its value falls to, or below, a certain price. OCO orders are a combination of limit orders and stop loss orders.
Vanilla Options
The most basic option that gives you the right, but not the obligation, to exchange currency at a specified rate at a known date in the future.1
This is an ideal option when you wish to protect against the possibility of adverse movements or benefit from favourable movements.
Zero-Cost Options
A variety of options that can offer protection, like vanilla options, but sacrifice some of the benefits in exchange for not having to pay an up-front premium.1 Whilst zero-cost hedging allows you to limit your losses, your potential upside is also capped.1
Ian Holdcroft, Co-founder, Shackleton
"Over the last year, uncertainty has added extra stress around planning as no one really knew what would happen with duties and VAT etc. Using somebody like Moneycorp, you can hedge some of that risk, and you have access to an internal team of analysts who are closer to the action in terms of understanding the likelihood of sterling weakening or strengthening versus the dollar or euro, which is really helpful. It’s a heck of a lot better than the service you get from a high-street bank, for instance."
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FAQ
What is FX/currency hedging?
Currency hedging is the practice of protecting your business from unwanted exchange rate movements. This can be done via currency contracts or options, all of which have different functions and goals and play an important part in a risk management strategy.
Why might my business need an FX risk management strategy?
A risk management strategy could help you limit your currency exposure and protect your profits.
All major currencies—whether due to politics, economics or other external factors—will fluctuate against each other. Whether your organisation is an importer of goods from abroad, regularly receives payment in foreign currencies or relies on paying international staff in local currency, international payments increase your exposure to ever-fluctuating exchange rates.
These sudden exchange rate shifts can affect the value you receive when exchanging currency creating financial risk and making it difficult to forecast costs and income.
What are the steps to building an FX risk management strategy?
Firstly, your qualified Relationship Manager will get to know your business and the role foreign exchange plays in it. You will then specify your goals and agree on budgets so that a unique FX risk management strategy can be developed to suit your needs. Along the way, your Relationship Manager will provide guidance and work with you to select appropriate hedging solutions. Finally, your Relationship Manager will then begin executing the agreed FX risk management strategy, providing updates and making adjustments in line with market changes.
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