Managing Currency Risk With Forward Forex

By Adeline T on Monday, 15 September 2008

Any recommendations for exporters new to the foreign exchange market?
IC: “If you have no idea where the currency is going to go, do a forward contract and try and match your cash flow. If you think the Australian dollar is going to fall in the next few months and you want to hedge out a year, buy a call option so if you’re wrong, you’re still protected, and if you’re right you get a better result. Don’t do nothing and think ‘when it goes down I’ll put things in place’—that’s a currency view we tend to discourage, because it might go up. Either take forward cover or buy an option.

“Every now and again we see someone who wants to punt the currency because they think they can outguess the market. We tell them ‘you’re in business to sell widgets, you’re not in business to punt the currency’. If you can outguess the market, then maybe you shouldn’t be selling widgets—you should be in treasury.”

* Figures used were accurate as at July 21 2008.

GLOSSARY
call: a right to buy a particular asset at a specific price within a specific time; e.g. for an AUD call option, the right to buy Australian dollars.

forward points: the difference in interest rates between two currencies in exchange rate points, added or subtracted from the spot rate to give the forward rate.

hedging: protection of an asset or liability against a fluctuation in the foreign exchange rate.
non-deliverable forward market: a cash-settled, short-term forward contract on a foreign currency, calculated by taking the difference between the agreed exchange rate and the spot rate at the time of settlement, for the agreed notional amount of funds.

put: a right to sell a particular asset at a specific price within a specific time.

spot rate: the price of an asset for immediate delivery, or in the case of foreign exchange, for delivery in two business days.