A French company orders equipment from a Chinese supplier for 100,000 dollars, with payment scheduled in two months. Between the order and the payment, the EUR/USD exchange rate can fluctuate by several percent, without the company having any say in the matter. This cost, or gain, is entirely beyond its control. This is precisely what currency hedging helps to avoid.
What is a foreign exchange hedge?
Currency hedging involves fixing today the exchange rate that will be applied to a future foreign currency transaction, such as a supplier payment or a customer receipt. Rather than suffering the daily rate at the time of payment, the business knows in advance, as soon as the hedge is set up, the exact amount it will pay or receive.
The objective is not to speculate on currency movements, but to secure a margin, a budget or cash flow already committed to a commercial operation.
A concrete example
A company must settle 100,000 USD in two months. At the time of ordering, the EUR/USD rate is 1.10, representing a forecast cost of 90,909 euros. If the rate drops to 1.05 at the time of payment, without hedging, the actual cost climbs to 95,238 euros, a loss of more than 4,300 euros on this single transaction. With a hedge in place from the time of ordering, the rate of 1.10 remains guaranteed, regardless of the market rate at the time of payment.
Who is affected?
Currency hedging concerns any company making payments or receipts in foreign currencies: importers, exporters, e-commerce merchants with foreign suppliers, travel agencies paying international service providers, or service companies billing clients outside the euro zone. It is not reserved for large groups; many SMEs use it to secure a budget or a margin on a one-off transaction.
The main instruments, without the jargon
The forward contract allows a rate to be fixed for a date and amount known in advance; this is the instrument most used by SMEs. The currency option offers more flexibility, giving the right, but not the obligation, to use a rate fixed in advance, in exchange for a premium. Other more flexible solutions exist for companies wishing to retain a degree of participation in favourable market developments.
Mistakes to avoid
Waiting for the right moment to hedge is the most frequent mistake: currencies move in an unpredictable way, and the objective is not to guess the market but to reduce uncertainty. Hedging too small a portion of exposure is another classic mistake, which leaves a significant amount of risk unmanaged.
How OSolto supports you
OSolto provides access to currency hedging solutions on competitive terms, close to market conditions. A dedicated contact person analyses your currency flows, your deadlines and your acceptable risk level to define a strategy adapted to your business, whether it is a one-off operation or a regular hedging policy.
Do you have foreign currency payments or receipts coming up? Speak to an OSolto expert to assess your exposure to foreign exchange risk.
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FAQ: currency hedging for SMEs
Does a currency hedge allow you to make money on currencies? No, its objective is to reduce uncertainty and secure a margin or a budget, not to make a profit on market movements.
Is it necessary to hedge 100% of currency risk exposure? Not necessarily. The level of hedging depends on visibility over future flows and the company's capacity to absorb an adverse change.
Can an SME set up a currency hedge for a single transaction? Yes, currency hedging is not reserved for a global policy; it can apply to a single transaction, such as a one-off supplier payment.
