As a business transferring funds abroad, you might have heard of currency hedging, or you might have even used it without realising it. If your business makes regular transfers overseas, hedging your risk is paramount. No matter what currency pair you need to trade in, exchange rates will potentially impact your bottom line. This is why, using hedging as a strategy to reduce risk is important, even when you might not benefit from it. The way to see hedging is as an insurance measure: if something goes really bad, then you will definitely protect your funds and your business.

Currency hedging

Put simply, hedging refers to currency strategies and ways to protect your funds from future currency movements. It involves entering a financial contract to limit the impact of foreign exchange risk on your international money transfers. Currency hedging is used by financial investors and businesses to reduce currency risks when conducting business internationally.

If you have an international business and want to safeguard your funds, then currency hedging is essential. In currency hedging, you can choose the type of contract that suits your needs and requirements so that you protect yourself from losing out if there are unexpected changes in currencies that will affect you. For example, businesses commonly use a Forward Contract, which locks in an exchange rate for a predetermined amount that can be used in the future, usually up to 12 months. Businesses very often have specific currency transactions they want to perform at a specified time and set intervals. By purchasing and booking a type of contract that will achieve their set goals and protect from unnecessary risks, they manage to reduce to a great extent their exposure to currency movements that might hurt their funds.  

While hedging can be complicated as there are various mechanisms to choose from when considering a hedging strategy, usually it is wise to understand and analyse potential foreign exposure and proceed to evaluate the relevant goals and actions needed to mitigate against that risk.

Why your business needs it?

Hedging is best suited to a business that deals with regular international payments and buys goods or services on an ongoing basis. If your business does not have such requirements and instead you want to send funds internationally whenever it is needed, then it will be more beneficial to have the freedom to take advantage of currency volatility and send your funds whenever the opportunity arises. If you commit yourself to a forward contract, then you might be missing beneficial market movements. So, currency hedging is ideal for businesses that depend on regular currency transfers and thus need to protect their liquidity.

If you are considering hedging, it is best to make sure that all goods or services’ orders are final and are going to be delivered, so you can confidently proceed to hedge based on those numbers. Unless you are sure, it is best to avoid committing to a contract based on estimates and uncertainty as this could leave you with a loss if your contract fails to go ahead. At the same time, you will also need to be aware, that even if you have taken the necessary measures and chosen to use a Forward Contract, it is possible that market volatility does not go against you, but since you have committed to the contract you need to remain faithful to it and complete it. For this reason, you have the choice to take advantage of both future and spot contracts and create a combination of hedging where you can still reduce the risk of any unexpected movements.

Currency hedging is also important when your business deals with countries where political or other events might amplify currency volatility. If you are trading with a currency that could be subject to extreme swings, then you need to make sure you are protected.

Managing currency risk is a specialised area. Universal Partners FX can help you develop the right hedging strategy and stay protected ahead of volatility.

Trading internationally? Save money with Universal Partners FX

If you are making international money transfers, you will need a cost-effective and secure way to do so. Universal Partners FX is the right partner for your foreign exchange. With UPFX, you can open a multi-currency account, send and receive money worldwide with low and transparent fees. You can also manage your money and send international payments 24/7 through UPFX’s easy-to-use online platform powered by Currency Cloud.

If you are an exporter or plan to start your international business, get in touch now with Universal Partners FX to find out how much you can save in your international money transfers.