What Is Your Pain Threshold?

Lower Your Costs

For a $982 hedging cost, you can avoid risking $108,750 to foreign currency fluctuations. Find out how in the following scenario.

If you conduct business in foreign currencies without a forex hedging plan, you are rolling the dice on your profits. As currency rates fluctuate, by the time you need to conclude a transaction you could see great gains...or great losses.

Recent EUR/USD foreign exchange rates have fluctuated greatly, with 30-day volatility hovering around 9%. This volatility may increase or decrease the value of your receivable by 9%. Are you willing to take the risk if your account receivable falls by 9% or future payment goes up by 9%?

A Scenario

Suppose your USD reporting company has a EUR 750,000 receivable asset in 45 days at a recorded exchange rate of 1.45000 (EUR/USD rate), for a recorded amount of USD 1,087,750.

What if the rate changes in 45 days when you collect your euro receivable? Roll the dice...

Are you betting on future rates? Are you comfortable with a potential $108,750 loss?

Hedging Foreign Currency

Why roll the dice and risk losing money? For the above scenario, your company could guarantee that it receives the USD amount of $1,087,750 in 45 days with a hedge cost of only USD 982. (See the cost breakdown.)

Forex hedging acts like an insurance policy: the 0.09% of the asset value you spend on hedging protects your asset from a negative shock. A hedging strategy helps you reduce currency exposure and the risk associated with currency movement.

Forex hedging is easy to do, easy to understand (once it has been explained), and relatively inexpensive. If you had a USD$1 million foreign asset to be realized in 45 days, what is $982 worth to you? It’s probably less than the sales staff spent to win that sale. Are you willing to gamble that future exchange rates will be favorable to you, when $982 would remove this risk?