Currency fluctuations can turn profit into loss

Few Danish companies safeguard their business against currency movements, according to a survey by the Confederation of Danish Industry. Should they?

Many factors can affect the fluctuating global currency market in the period between a signed deal and the final payment. The fluctuations create cash flow uncertainties for businesses and headaches for their CFOs, with the risk of increased purchase prices and decreased selling prices.

That is why you should always have a hedging strategy in place to help mitigate the risk of currency fluctuations and the potential negative impact on your forecasted profits.

How many Danish companies use hedging?

The Confederation of Danish Industry recommends that Danish companies evaluate how hedging can assist in managing currency risk. Despite these recommendations, a survey from the Confederation (in Danish) shows that only 10-33% of Danish companies hedge their activities in USD, GDP, NOK and SEK (depending on currency). These currencies represent the biggest trading partners for Danish companies, along with EUR. The survey is based on 345 companies in Denmark.

Despite the low use of hedging, annual currency fluctuation can be up to 10%. The graph below shows the volatility of the individual currencies.

The graph summarises the findings on Danish companies’ currency flows, hedged and unhedged, from The Confederation of Danish Industry as well as the volatility for the four currencies, USD, GBP, NOK and SEK.

How much can currency fluctuations affect financial results?

Example: Exchange rate exposure for a hypothetical Danish company

The currency composition in the graph below includes the most important trading currencies for Danish companies (aside from EUR). The specific composition has weakened 13% relative to DKK since the end of 2015, according to the graph below. A weakening of this magnitude has most certainly hit companies that do not systematically hedge their currency risks. By hedging, a company can reduce uncertainty and protect its business.

The graph above shows the DKK currency fluctuation relative to USD, GBP, NOK and SEK since January 2013. The example is based on 25% USD, 25% GBP, 25% NOK and 25% SEK. From the data it is evident that a weakening of 13% has occurred from late 2015 until May 2018.

Nordea Markets can help you manage your currency risk

We help estimate your company’s foreign exchange exposure as well as provide you with an overview of the different hedging solutions. We will help you set up a currency policy, create a currency account and give you access to the e-Markets portal. Here you can quickly and easily hedge your currency exposure from your laptop, tablet or mobile phone wherever you are.

Still not sure whether your company needs a currency strategy? Ask yourself three important questions from Niels Christensen, Chief Analyst in Nordea Markets.

Want to know more? You are welcome to contact us via markets.dk@nordea.com.

The information provided within this website is intended for background information only. The views and other information provided herein are the current views of Nordea Markets as of the date of publication and are subject to change without notice. The information provided within this website is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.

The information provided within this website is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information provided within this website has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.

Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.

The information provided within this website may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.

Further reading

Get insights directly in your inbox

Sign up here to receive newsletters and learn more from our world in Nordea Markets.