Foreign Exchange Hedging

A significant number of SMEs in the UK are exposed to foreign currency risk but are insufficiently hedged. Many companies underestimate this risk to their Income Statement and Balance Sheets.

Firms that trade with international partners need to view their overall foreign currency risks from a holistic perspective, including commodity risks and supplier/payment options. Vedanta Hedging will help you to understand the true risks across all of your currency pairs. FX risk directly affects cash flows, stock levels and, of course, the Income Statement.

As your business grows, it may no longer be optimal to buy your currency at ‘spot’ or using ‘Forward Contracts’. There are many derivative-based solutions that can help protect your FX risk, while also providing you with commercially attractive outcomes.

The rationale for foreign exchange hedging is to increase the transparency and certainty of currency movements. In our experience, banks and brokers can sometimes advise clients to use more complex products than are suitable for them.

Understanding and monitoring foreign exchange risk can be time-intensive. We are experts in this field and with our help, you can focus your time and efforts on your underlying business, instead of trying to ‘time the markets’. Businesses have cited the costs and complexities of hedging as reasons not to protect themselves against foreign exchange risk. Collateral requirements may also seem daunting. Without access to market rates and an in-depth knowledge of the foreign exchange market, many SMEs struggle to negotiate a fair deal. We have found that the majority of SMEs simply accept the price from the bank as given and sometimes do not even know how much they are being charged.

Although a foreign exchange hedging strategy may be appropriate for you, this cannot be executed without considering the appropriate market timing and ensuring price transparency.

We have also helped a number of firms do an ‘FX MOT’ whereby ‘we kick-the-tyres’ to check a variety of metrics and how they compare to their peer group. Examples include checking spot margins, forward margins, the strategy, the amount and duration of hedging, the type of instruments used, the setting of budget rates, choice of counterparties and more.

Vedanta Hedging will ensure that at every step, clear and simple language is used, to help understand exposures and the various hedging options available, in contrast to ‘market jargon’ that Banks often use. Some of the instruments that can be used for Risk Management include Swaps, Forward Contracts, Options, Collars and many others. Vedanta can also help your Finance function review their internal processes which can also reduce foreign currency risk, which may not necessarily involve the use of derivatives.