5. What is currency hedging?

5. What is currency hedging?Currency hedging techniques consist of transactions aimed at keeping the buying power of a currency through forward contracts or spot contracts.

Iulian Lupu, financial expert at the trading department with Bucharest Stock Exchange said that the main stages in currency hedging are the staff training for the execution of transactions, identification of the currency risk, as well as finding the risk management options.

Companies must work closely with a financial institution that could provide them assistance in finding the best solution to minimize currency risk, and in executing currency hedging transactions.

The most important stage is when companies assess the effectiveness of the operation over their balance.

4. Who uses currency hedging vehicles?

4. Who uses currency hedging vehicles?“Currency hedging is usually an approach employed by companies with currency exposure generated by international investment schemes, such as export-import, financial transactions (fx credit, and payments in lei), dividend payout to parent company and payment in lei for raw materials carried at the rate of exchange set by the National Bank of Romania”, said Cosmin Bucur, VP Corporate RBS Romania.

Not all managers see a risk in the operations they carry, Iulian Lupu continued, but if they have a risk aversion, this fear should reflect in their decision to use currency hedging vehicles.

3. Currency hedging doesnt maximize profits

Hedging operations, whether currency, interest or for adverse price movements, is intended to minimize risk and raise predictability, instead of maximizing profits, Cosmin Bucur outlined. However, it doesn’t mean that hedging vehicles cannot generate profit or loss, but this is not the purpose here.

“Narrowing price movements, and raising predictability are the main purposes why leaders use hedging vehicles”, RBS’ analysts added.

Iulian Lupu points out that the difference between profit and loss depends on several factors and currency hedging can be one of them.

2. How to currency hedge?

2. How to currency hedge?In order to avoid unwanted price fluctuations, companies can use one hedging strategy or a hedging vehicle mix.

“All financial institutions have their own resources for currency hedging operations. All the other companies and institutions, in different currency hedging stages should work closely with a financial institution”, said Iulian Lupu.

A leader should develop a close partnership with the Treasury of the bank he is working with, Cosmin Bucur pointed out. A leader should know the name of the vehicle, communicate its objectives to the bank, the cash flow, seasonality, risk management policy, products that can be used in these transactions.

“Together with the bank, a leader will devise strategies, scenarios and simulations that he will use according to market expectations, the flexibility of the strategy, the type of vehicle employed, personal risk appetite of the company’s treasury and his expectations about the performance of the market”, said Cosmin Bucur.

1. How to currency hedge in a stable forex market?

1. How to currency hedge in a stable forex market?Companies can do currency hedging even in a relatively stable forex market.

“Instead of hedging currency risk 100%, we can start by hedging only 65%. We look for a product to minimize the risk up to a point where the market can cope with it or we look for a more flexible vehicle. Also, we can choose another vehicle that reduces currency risk and provides advantages even under minor currency movements”, said the representative of RBS Romania.