How to hedge currency risk: a guide to foreign exchange
The foreign exchange market is ever-changing. If an internationally operating company deals in multiple currencies, there’s a good chance that it will be affected by fluctuating exchange rates.
Having the right measures in place to mitigate currency risk can help stabilise your portfolio – this is known as hedging. And the good news is, there are multiple ways to offset these risks.
Failing to manage currency risk is a significant issue that affects lots of businesses worldwide.
In 2018, 70% of Chief Financial Officers surveyed by FT Remark and HSBC reported that their businesses had suffered reduced earnings in the two years previous because they didn’t hedge their foreign exchange risk.
This article will look at the ways you can attempt to reduce the effects of currency fluctuations on investment performance through forward contracts and other strategies.
What is currency hedging?
In simple terms, currency hedging offers protection against potential financial losses. In this case due to how prone the foreign exchange market is to fluctuate.
Companies and individuals hedge to increase their stability, to make sure their portfolio is in a strong position, and to offset currency risk. Some exposure to market fluctuation is normal when dealing with foreign currency but having hedging strategies in place can help to reduce uncertainty, regardless of what happens in the market.
In this way, hedging is like taking out insurance. It doesn’t stop the markets from fluctuating, but it does put you in a better position if something unexpected happens.
How to hedge currency risk with our personalised solutions
At Halo Financial, we have a variety of smart currency hedging solutions. These solutions ensure that currency fluctuations don’t impact your profit margins, helping businesses to create reliable forecasts and manage budgets more effectively.
Our solutions include:
- Forward contracts – set your exchange rate now and pay up to 12 months later
- Automated orders – payments are only processed once an exchange rate hits your desired level
- Spot contracts – set your exchange rate now and pay the same day.
Whether your business needs to make a quick same-day transfer or secure an ideal exchange rate to pay in the future, we have an option to suit your needs, saving you time and money.
Forward contracts
Forward contracts are private agreements between two parties that allow you to fix an exchange rate in place for a certain period. An agreement like this allows you to more accurately predict costs and hedge currency risk. With frequently changing market rates, currency futures or forward contracts offer predictability and can help you stick within your budgets.
However, setting up forward contracts means you could miss out on the chance to benefit from positive fluctuations. So while you might be saving yourself from losing money, you could also prevent yourself from gaining extra. Balancing out the potential risks compared to potential gains will be an essential part of assessing your portfolio.
Automated orders
If you’re looking to buy or sell a specific amount of currency at a predetermined exchange rate, automated orders, also known as a stop-loss order may work for you.
It’s a 24-hour automated order that helps to protect buying or selling currency from adverse fluctuations in the exchange rate. As it allows companies to protect their profits first, then enhance the value of their currency if exchange rates rally in their favour, it’s a very popular hedging strategy. This can all be done without needing to constantly monitor exchange rates.
Spot contracts
If you require overseas payments at a precise time or at speed, one of our experts can work with you to identify the best time for you to make your trade.
A spot contract or spot rate is a trade now, pay now foreign exchange solution that supports you to make the most of the current exchange rate. You can agree to an exchange rate and then buy or sell currency right away or within two business days.
Use Halo Financial for your currency hedging strategy
You’ll have access to a dedicated and qualified currency specialist who can help you create a plan specifically for your business needs. We provide fast payments that enhance your business’s efficiency and monitor exchange rates 24/7, maximising your ability to get the best deal.
We’ll also send regular currency market updates to keep you up to speed and can assist you in making informed decisions.
The bottom line
If you’re looking into hedging your portfolio against currency risk, there are many options available. Halo Financial gives you access to our team of experts who can help you make the right decision for your company.
We pride ourselves on award-winning client service; let’s work together. Register for a Halo account today.