UK: SME/Columnists - Steal a march on the currency dealers.

UK: SME/Columnists - Steal a march on the currency dealers. - Finance: why export hedging is worthwhile.

Last Updated: 31 Aug 2010

Finance: why export hedging is worthwhile.

Perhaps you think you have better things to think about than hedging your bets on unpredictable movements in exchange rates. You could have a point - the cost of hedging can be high and you may be tempted instead to focus your energies on getting the goods to market. But if you run an SME with a large percentage of trade in foreign denominated currencies which go haywire, you could be in big trouble.

Hedging can be done in a variety of ways, including average-rate options and fixed-rate forward contracts. The former guarantees a fixed exchange rate over a period of time, for example, nine francs to the pound for six months. If the pound weakens, a British company exporting to France would straightforwardly gain. If it strengthens, then the company is protected.

The latter method ensures, at a price, a particular exchange rate for a particular amount at a particular date in the future.

There are other sensible ways to guard against the impact of foreign exchange exposure. The most obvious of these is to build foreign exchange fluctuations into your pricing strategy. Assume an exchange rate for your company, but try to build in an allowance for what you see as the more likely fluctuations, as well as the costs of running a foreign currency account.

In the longer term, the foreign exchange market will go in your favour as many times as it hurts you. But there is little consolation in the company being right in the long run. Unless you think carefully about the impact of foreign exchange transactions, your company may not survive long enough to tell the tale.

Sarah Gracie is a senior writer at Venture Capital Report.

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