The HOW of Hedging

CalendarNovember 15, 2023

The HOW of Hedging:

How you build your strategy, implement it and monitor it

Next, we address the HOW: building your strategy, implementing it. And reviewing and monitoring it.

A good strategy can remove a lot of the uncertainty about whether or not you should be hedging.

No strategy is perfect, but the key is to have one to begin with. You can always work on improving it, which, in my opinion, is a lot better than having no strategy at all.

Here are some important considerations that will help you develop and implement your strategy:

  • Pricing.

Pricing is not an accounting item but a component of your business. Consider how you price your product, for how long your prices are fixed, and how often you can change your pricing.

  • Your risk profile.

Everybody's risk profile is different. Are you comfortable taking on some of the currency risk, warehousing some of the risk, yourself?

  • Your budgeted rate.

What is the rate you need to achieve on your FX in order to protect your margins? And is that rate achievable?

  • Your financial position.

If you are in a good financial position, you might decide to hedge a portion of your requirement.

  • Your competition.

In a highly competitive business sector, currency hedging might be a challenge.

  • Execution.

Can you execute the plan that you have in place and the strategy you have in place? Do you understand the products you are using and the possible outcomes? And are you able to stay the course? At times you may be tempted to change your strategy because of a view on the market.

Each business is different, with a different risk appetite.

It's not what a competitor or a vendor might do, or based on the opinion of someone unrelated to your business. It’s your business and your strategy. Your business will tell you what you ought to be doing.

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