Hedging Strategies For Protecting Profits In Singapore Forex Trading – In today’s global business environment, protecting your business from currency risk is more critical than ever. Explore 4 ways to do it.
With the world getting smaller every day and technology making it easier to build relationships in faraway places, you’ve decided to venture into foreign markets. There is a whole world of partners, products and new markets out there that can take your business to the next level.
Hedging Strategies For Protecting Profits In Singapore Forex Trading
Cash flow is the number one reason small businesses fail, and this risk is heightened in an environment where currency fluctuations can erode margins and hurt your bottom line.
Hedging Currency Risks Systematically
Currency risk management helps minimize the effects of foreign exchange on cash flow by developing a strategy based on the unique needs of an individual business. If you can work across borders while avoiding currency-related losses, you are positioned to expand your reach and grow your business.
No business can manage currency risk without understanding where currency exposures exist and what it is currently doing to protect against volatility (if anything).
• Start by assessing your business goals and how they are affected by exposures. Talk to a variety of people in your company to get different perspectives on what’s working and what isn’t.
• At this stage, it can be beneficial to use a monitoring and analysis tool that evaluates your upcoming invoices against real-time rates to highlight where profit is exposed. Such a tool will also show the price of these invoices in your local currency.
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With an understanding of your business goals and a handle on the local currency costs of your foreign invoices, you have the power to start making informed decisions.
Define some objectives specific to managing currency risk. This may include defining a target rate to help achieve your set margins or determining what percentage of a payment needs to be hedged against currency fluctuations.
Consider establishing a formal risk management policy to define processes and ensure staff are held accountable. It may sound time-consuming, but a strong, concise document can easily be created – especially with the assistance of a currency specialist.
Choose the right coverage tools for your business. One size does not fit all and the strongest strategies are driven by specific business requirements associated with changing currency exposures. Many companies use a combination of tools to form their strategy.
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Once the most effective hedging instruments have been selected, applying the right trading tactics can mean the difference between success and failure.
Few companies are prepared to completely ignore the opportunities that can be captured when currencies move in their favor, often putting themselves at risk as a result. The strongest strategies recognize a framework for executing trades at favorable levels while protecting against significant risks.
It is also important to review the market and identify recent trading patterns to understand the risks and opportunities available.
For many small businesses, following the markets is complicated and time-consuming. Talking to a specialist can help determine market direction and where that consensus is vulnerable to adjustment. Market adjustments lead to currency volatility, creating both risk and opportunity.
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Currency fluctuations operate independently of business fundamentals, such as profit projection. To keep plans on track, you need to monitor your strategy and adapt to new circumstances and market conditions. It is crucial to identify shortcomings and build on successes.
Preparing a short “performance profile” document at these points can help communicate important information to internal and external stakeholders and ensure that the strategy remains relevant and effective as the business evolves over time.
The currency market and its management are not easily summarized in a few hundred words. These four steps are the nuts and bolts that can help you build a successful risk management strategy. The takeaway is that currency fluctuations don’t have to be a cross to bear.
Many small businesses are prepared to accept currency fluctuations as a cost of doing international business, or that only large companies have the strength to engage in currency risk management.
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The reality is that with some proactive planning and specialist knowledge, a business of any size can ride the ebb and flow of volatility into international growth.
Currency derivatives are financial products that may involve risks or losses for your business and therefore may not be suitable for every business. Contact a specialist for further information.
Whether you are an established international company or entering foreign markets for the first time, there is a lot to consider when choosing the right payment provider. Trade Finance Global / Business Currency | Trade Finance Currency Solutions | FX Hub / Currency Options – What are currency options?
A currency option gives you the right, but not the obligation, to buy or sell currency at a specified rate on a specified future date. A vanilla option combines the 100% protection of a foreign exchange futures contract with the flexibility of taking advantage of improvements in the foreign exchange market.
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This acts as an insurance contract. In return for such a right (without obligation), the holder usually pays a cost known as the premium for the FX option.
Currency market fluctuations can have a lasting impact on cash flow, whether it’s buying a property, paying wages, making an investment or settling invoices. By using FX options, the company can protect itself against negative movements in exchange rates.
This feature of FX Options makes them extremely useful for hedging currency risk when the direction of movements in exchange rates is uncertain.
Currency options are also useful tools that can be easily combined with Spot and Forward contracts to create tailored hedging strategies. FX options can be used to create tailored solutions and work to remove the upfront cost of a premium – this involves certain caveats around the structure of the options product.
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Strike Price – The strike price (or exercise price) is the price at which the option holder has the right to buy or sell a currency.
Expiry Date – The trade’s expiry date is the last date on which the rights attached to an option can be exercised.
Exercise – The act of the option buyer notifying the seller that they intend to deliver on the option contract.
Call Option – This gives the holder the right, but not the obligation, to buy a particular currency at a pre-agreed rate up to the expiry date.
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Put Option – This gives the holder the right, but not the obligation, to sell the specified currency at a pre-agreed rate up to the expiration date.
For example, a UK-based company imports materials from the US and needs to pay a supplier $500,000 in six months.
The UK company wants to benefit from a favorable exchange rate while having 100% protection against adverse market movements and is willing to pay a premium for this.
Scenario 1: GBP/USD weakens, at expiration the exchange rate is 1.2500. You are eligible to buy your full $500,000 at 1.3250.
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Scenario 2: GBP/USD strengthens, at expiration the exchange rate is 1.4575. You let your currency option expire and simply buy $500,000 at the market rate of 1.4575, thus taking advantage of the 10% improvement in the exchange rate.
A participating forward provides a guaranteed protected interest rate for 100% of your exposure, while allowing you to benefit from a favorable move on a pre-determined portion of your currency exposure.
The British company wants to benefit from favorable exchange rate movements, but is reluctant to pay a premium for this.
They are prepared to accept a worst rate of 1.3200. We then calculate the participation level at 50 per cent.
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Scenario 1: GBP/USD weakens, at expiration the exchange rate is 1.2900. You are eligible to buy your full $500,000 at 1.3200.
Scenario 2: GBP/USD strengthens, at expiration the exchange rate is 1.4200. You are required to buy $250,000 at 1.3200. However, the remaining $250,000 can be purchased on the spot market at 1.4200. This will give an effective rate of 1.3700.
The Gloucestershire-based company is the largest supplier of household electronic appliances. Trade Finance Global and their forex partners worked with the company to come up with an options forex strategy to mitigate risk while the company grew and competed with their previous forex provider.
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Mark leads the trade finance offering at TFG where his team focuses on bringing alternative structured finance to international trade businesses. Before joining TFG (),
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