Why you Need an Exchange Hedging Strategy to Protect Business Profits

Last Updated: 23 Mar 2021

Why you Need an Exchange Hedging Strategy to Protect Business Profits

Currency exchange rates are volatile and can add extra risks in doing business with foreign companies, especially in today's economic climate. If exchange rates are not fixed when business deals are finalized with international customers, you open your business to currency risk that creates added costs, impacts profits, and can reduce your cash flow. Disregarding currency risk is a bad business practice, no matter the size of your company or the industry you work in.

With proper planning and consideration, a currency hedging strategy can be a highly effective way to combat volatility and avoid currency fluctuations that can reduce profits and shrink margins.

Volatility is the Problem; Hedging is the Solution

To safeguard your business against currency exchange volatility, many Canadian and U.S. firms are putting strategic hedging strategies in place. Creating a customized hedging strategy for your business involves incorporating tools such as Forward Contracts and Market Orders.

It is important to plan out your strategy with clear goals in mind for your business as it will determine the risk management tools you employ. Are you most concerned about FX exposure? Then maybe a Forward Contract is your best option. Are you looking for cash flow certainty? Then you can consider a Spot Loss Order. Whatever the tool is you work with, ensure that it will attain your overall business targets.

The Power of Forward Contracts

A Forward Contract allows you to purchase a certain amount of foreign currency at a predetermined exchange rate, allowing you to lock in the exchange rate effective at the moment, guaranteeing the cost of payables or receivables irrespective of market volatility.

Forward contracts can create a currency budget benefit as they do not involve any upfront payment and can be tailored both to a particular amount as well as a product delivery date range so you can plan your budgets accurately.

How Placing a Market Order Protects your Cash Flow

A market order allows you to request a foreign exchange conversion for a specific amount at a targeted exchange rate. Similar to a stock market transaction, the order is placed, and the buyer is not required to monitor the market for a preferred rate to lock-in. When the exchange rate reaches the amount specified in the market order, the buyer is notified, and the order is filled without any additional intervention.

When it comes to Market Orders, there are two different types you can choose from depending on what you need for your business. The first one is Limit Orders. Limit Orders allow you to target exchange rates better than the current market rate, and the second option is Stop loss orders which protect your business against market volatility by giving you the ability to set a worse-case exchange rate that your business can tolerate and is willing to commit to.

Currency exchange rate volatility can affect the cost of your overseas business transactions. If that cost is higher than expected, budgets can be skewed, and growth stunted. Putting the right currency hedging strategy in place does not have to be a complicated process when working with the right partner who has extensive experience within the international payments and risk management space.

MTFX Hedging Strategies Will Protect your Business Across Borders

Learn more about how our solutions can help you retain your local customers and expand your international business. Contact one of our market experts and we will show you how foreign exchange currency risk management strategies can protect your business while increasing profits.

Open an account today and see how our digital payment platform can improve your profitability and keep you agile and active in the global market. 

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