Currency hedging

Hedge your company’s currency risks effectively

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Hedge your company’s currency risks

Your company is exposed to currency risks whenever it does business in a non-euro currency. Exchange rates can vary in the time between entering a contract and currency repatriation or payment. Other sources of currency risk include exposures and holdings, or future transactions, in foreign currencies.

The size of currency risk depends on the company’s overall currency position, the size of the business transaction, and the billing period. Other factors are your foreign-currency business as a share of net sales, your pricing power and the competitive environment.

Currency risk can form when a company buys items from abroad in the local currency but sells them in its home country in euros. The company buys at a fixed price in a foreign currency, but is only billed at some point in the future. Meanwhile, it has had to set its sales prices in its local currency. Correct quantification of currency risk is therefore the key to currency hedging.

Hedging can reduce the impact of exchange rate movements on your company’s finances: you can make your company’s finances more predictable, maintain liquidity and reduce fluctuations in cash flows and income.

Currency hedging products

You can use our hedging products for protection against exchange rate movements in expected cash flows, not just done deals. The most commonly used hedging products are forward exchange rate contracts, currency swaps and options.

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Hedging can also be customised to meet your company’s needs: combining several hedging products can create cost-effective hedging structures that provide the protection you want against exchange rate movements. Forward exchange rate contracts and swaps are easy with OP’s electronic foreign exchange trading system.

Please contact your OP experts, who will be delighted to tell you about the best hedging solutions for your company!

Forward exchange contracts

A forward exchange contract is an agreement between banks on a forex trade to be done on a future date.
The price of a forward contract is derived from the spot rate of the currency pair and the interest rate difference between the currencies. A forward rate is not an exchange-rate prediction.
Although a forward exchange contract is binding on the customer and bank, it can be flexibly rolled forward – or closed out at any given moment’s spot rate.
As the most common choice of currency hedging instruments, forward exchange contracts are suitable for companies of all sizes.

Currency options

A currency option is a right to buy or sell a currency at a certain time on agreed terms.
When buying a currency option, the customer must pay a premium but has no obligation to exercise the right to buy or sell. In other words, a company can buy a currency option to hedge against unfavourable exchange rate movements.
A company can also use options to build a zero-cost hedging structure. An example of this would be a risk reversal, where a bought option provides protection but a sold one limits the benefits gained from exchange rate movements.

"There is no absolute way to know if the dollar will go up, down or sideways – it may well do all of these things. The only certainty is that it will move."

Claude Tygier, CEO, who started his career as a foreign exchange trader

The service is provided by OP Corporate Bank plc.