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Why Your Company Should Develop a Hedging Plan
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|  Real-time Signals   |   Charting & Analytics   |   TA Newswire   |
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Real-world examples - To Hedge or Not to Hedge?
Smart companies minimize risk with active management techniques.

Overall, the message is clear: international businesses are now operating in a world that requires new
approaches to managing and mitigating FX risk. In pre-crunch days, the USD might typically move against
the GBP by between 100 and 150 FX points daily (e.g.: a range from 1.6000 – 1.6150). Today, the change
can be as much as 400 FX points in either direction in a single trading session. Given the continuing
sensitivity of the markets to unfolding events and new economic statistics, there is currently little sign of an
end to this heightened volatility.

The high level of volatility in the currency markets has led some to question the wisdom of viewing forward
contracts as the ‘risk-free’ alternative. Finance Directors, Corporate Treasurers and Financial Controllers
are often tasked with multi-functioning roles, within which FX Risk Management strategy is only one
element to be fitted into a busy day. Even small time delays in FX execution can lead to significant impact
in rates achieved. For example a 400 FX points daily range represents a gain or loss of US$400,000 on a
£10m exposure to GBP-USD. This means companies may need a more flexible (which does not need to
mean complex) approach to managing currency risk, be it transaction cost or operational in nature..

Companies that hedge their translation risk effectively generally do so by taking three steps:

•        Identify the size and nature of the exposure clearly.
•        Consider the impact on the balance sheet of either hedging this exposure or not hedging it.
•        Identify the key stakeholders concerns — analysts, public shareholders, venture capital backers,
bank lenders — and decide how to meet their concerns.

Now let's see some real word examples.

Timing is everything

A Thai exporter of locally sourced food stuffs has costs in Baht and earnings predominantly in US Dollars
to the tune of US$ 30m a year. They wanted to create a partial hedge at an ‘ideal’ exchange rate of 31
(USDTHB) for 180 days to cover Q1 and Q2 transactions.
The issue  faced was at the time the Baht was trading just above 30 to the Dollar, and the client was very
eager to hedge and unsure whether to just do the transaction at a lesser rate than their target rate of 31.
Our solution was to get them to do the exact opposite, and instead of selling Dollars we recommended
they instead hold off with both the hedging transaction and also to wait to convert their three million Dollar
inflows for a short period of time because we forecasted the Baht would weaken further.
The decision was made to convert the Dollar holdings a fortnight later, and in late January the company
made almost 2% on their USD sales conversion, and concurrently placed a hedge until mid year at 31 to
the Dollar, as was the original wish. The company gained USD$ 60,000 by waiting  a couple of weeks to
cover Dollar income, and got their target hedging rate whilst saving interest costs for a month by taking our
advice on market timing.

Full service or advisory only.

A palm oil producer and exporter client saw the need to somehow hedge energy costs, which was difficult
in their jurisdiction, and also to hedge / trade crude palm oil for investment gains
We designed an almost real-time crude palm oil futures analysis service for the client, with twice daily
updates, recommendations and fund flows analysis, with the aim to provide quantitative trading advice
that the client could follow and act upon through their futures broker. We also consulted on how best to
hedge energy costs – diesel in this case, through the use of NYMEX  futures. The client trades and
manages hedging in house  , but continue to use our analysis services for both crude palm oil and crude
oil futures
 
Hedging Applications can be passive and active

A car importer faced the dual problems of very strong local competition and pressure on margins for their
range of grey market Mercedes cars. At the time the EUR/USD was trading at 1.3600 or so, but the
company fully expected the Dollar to strengthen and therefore lower the cost of import from Germany.
Again, timing was key, so we advised the client to carefully consider the purchase plan to see if there was
some room to try and coordinate orders with currency moves – at least to the extent it would not effect core
operations. A plan was agreed, with 1.2500 the target price to cover the shorting hedge of the Euro Dollar.
The client was however aggressive and decided not only to fully hedge the EUR 17m purchase price, but
to double his hedge in to what was effectively an investment trade to short an additional EUR 17m. The
hedge was taken out for 120 days, but the type of instrument used offered variable closure with no
penalties.  The client held the hedge for 90 days or so, closed it before expiration and  managed to
increase their margins by fully hedging, and in this case taking a strategic decision to actively trade for
investment gains from time to time.
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Independent Currency & Commodity Hedging Analysis
for Emerging Market SME's
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