Currency hedging – why corporates need to have a currency strategy

Currency fluctuations create uncertainty and can quickly turn a solid profit into losses, says Nordea’s Niels Christensen

Currency fluctuations create uncertainty and can quickly turn a solid profit into losses and leave revenue projections to the whim of the currency market. “It is surprising that many corporates does not have a strategy for handling their FX flows”, says Niels Christensen, Chief Analyst at Nordea Markets.

Niels Christensen is speaking from experience, having 25 years of experience in the FX market and 10 years of servicing Nordea corporate customers with FX related challenges. Globalisation has led to Danish corporations being able to find more international customers to their product and services. This increases significantly the need to make sound assessment of currency risks in the international trade environment.

New market entry, new currency risk

As corporates grow, and entry into new markets becomes a desirable option, the currency fluctuations also become a risk factor to consider. “My experience tells me that companies often look to a currency strategy after a negative fluctuation has hit their result. My advice is that as soon as the corporate opens up for an external market, a currency strategy should be in place. This will make it easier to add new markets as the business grows whilst being confident that currency risks cannot offset the growth pace of the corporate”, says Niels Christensen.

Cost of production, a currency exposure

The cost side is equally important as more and more corporates take advantage of lower production costs abroad. “But do not forget that the production cost can be an exposure to a currency that is more volatile than the local currency. For some of our customers with production set ups in both Europe and Middle East, the currency exposure is a considerable risk that they need to manage. Of course, a currency strategy in those scenarios is a must. Usually the responsibility of managing this risk falls on the corporate CFO and a well-planned currency strategy is a great tool to minimise risks and secure a healthy growth for the business”, concludes Niels Christensen, Chief Analyst at Nordea Markets.

3 questions you need to consider:

  1. Have you mapped all the currencies your corporation is exposed to?
  2. Have you reviewed the cost side as well as the revenue side?
  3. Have you formed a short and long term currency hedging strategy?

 

To read more on managing currency exposure

For Danish corporates, click here

For Swedish corporates, click here

For Norwegian corporates, click here

For Finnish corporates, click here

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