11 Februarie 2010
5 things every leader should know about currency hedging
Currency hedging is an approach that is intended to protect companies and institutions’ revenues and expenses from the risk incurred by any shifts in the value of currency used in the investment scheme. In order to explain what currency hedging consists in and how it can influence a company’s balance, Wall-Street interviewed specialists in the field and compiled a list of five most important things every leader should know about currency hedging.
5. What is currency hedging?
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?
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 doesn't maximize profits
“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?
“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?
“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.