Finance & paymentsen
Currency hedging
Financial techniques used to protect against exchange rate fluctuations in international transactions.
Currency hedging refers to the financial techniques and instruments used to neutralise or reduce the impact of exchange rate movements on international trade flows.
The main hedging instruments are:
- Forward contract: an agreement fixing an exchange rate for a specific future date. The most widely used instrument, simple and without premium.
- Currency option: a right (not obligation) to buy or sell currency at a guaranteed rate. Provides protection while allowing benefit from favourable movements. Cost: 1 % to 5 % premium.
- Currency swap: exchange of cash flows in two different currencies over a given period.
- Natural hedging: invoicing in home currency, purchasing in the same currency as sales, internal netting.
The hedging strategy depends on volume, recurrence of flows and the company's risk tolerance. SMEs often favour forwards for simplicity, while large corporations combine multiple instruments in a dynamic hedging policy.
Public export credit agencies offer exchange rate guarantees for exporting SMEs, covering up to 100 % of currency risk on export contracts.