While I am sure when Coldplay sang “Nobody said it was easy” they weren’t talking about FX hedging (unless they were thinking of repatriating some of their royalties), it doesn’t have to be as uncertain and difficult as many business owners perceive.
Here at Hedgebook our ethos is very much “keep it simple” because often we find importers and exporters are scared to hedge. That’s because they don’t understand the implications of the hedges they are putting in place, whether they are simply using FX forwards or being a bit more edgy and using options, normally zero-cost.
The basics of FX hedging haven’t changed since currencies were first freely floated. At a basic level you need to have visibility over your position. This means:
- forecasting your current and future foreign denominated cashflows
- knowing what FX hedges you have in place versus your foreign cashflows
- overlaying all of this with real time foreign exchange rates.
This is commonly known as the “three pillars of currency risk management”.
By pooling this information together you get total visibility over your position to make informed hedging decisions. What happens if the currency goes up or down two cents? Do I care? Does it affect me achieving my budget rate?
As with anything, the more information, the better the decision. Everyone has a view on where the exchange rate is going but that matters little if you don’t know what the impact on your business is.
Nobody said it was easy but equally there is no reason for A Rush of Blood to the Head (to quote another Coldplay song). Have total visibility over your foreign exchange exposures and start making better decisions.
For a closer look at the building blocks required to simplifying foreign exchange hedging download our Dollars & Sense eBook.