Currency hedging explained simply for SMEs

What is currency hedging

Currency hedging involves locking in 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 being subject to the prevailing rate on the payment date, the company knows in advance, as soon as the hedge is put in place, 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 transaction.

A concrete example

A company needs to pay 100,000 USD in two months. At the time of the order, the EUR/USD exchange rate is at 1.10, representing an expected cost of 90,909 euros. If the rate falls to 1.05 at the time of payment, without hedging, the actual cost jumps to 95,238 euros—a loss of more than 4,300 euros on this single transaction alone. With a hedge set up right from the order stage, the rate of 1.10 remains guaranteed, regardless of the market rate at the time of payment.

The same risk exists on the receivables side. An exporting SME billing 50,000 USD to an American customer, payable within 60 days, faces the opposite movement: if the dollar depreciates before the due date, the amount received in euros decreases accordingly, without any change to the negotiated commercial margin. Hedging protects both directions of the flow.

Why this risk costs more than you think

Over the past year alone, the EUR/USD pair has fluctuated within a range of several percent, driven by central bank interest rate decisions. For an SME paying several tens of thousands of euros in foreign currency supplier invoices each month, an unhedged variation of 3 to 5% represents a cash flow gap that is difficult to absorb on an already tight commercial margin. This is not an extreme scenario: it is the normal fluctuation observed over a two- to three-month billing cycle.

Who is affected

Currency hedging concerns any business making payments or receiving funds in a foreign currency: importers, exporters, e-commerce retailers with overseas suppliers, travel agencies paying international providers, or service companies billing clients outside the eurozone. It is not reserved for large corporations; many SMEs use it to secure a budget or a margin on a one-off transaction.

The main instruments, without the jargon

A forward contract allows you to lock in an exchange rate for a date and an amount known in advance; it is the most widely used instrument by SMEs. A currency option offers more flexibility by providing the right, but not the obligation, to use a rate set in advance, in exchange for a premium. Other, more flexible solutions exist for businesses wishing to retain some participation in favourable market movements.

Mistakes to avoid

Waiting for the right moment to hedge is the most common mistake: currencies move unpredictably, and the goal is not to predict the market but to reduce uncertainty. Hedging too small a portion of your exposure is another classic mistake, leaving a significant amount of risk unmanaged. Finally, failing to monitor your hedged position over time—maturity dates, guaranteed rates, remaining amounts—leads to unpleasant accounting surprises at the time of settlement.

How OSolto supports you

OSolto, an international payments specialist registered with ORIAS (No. 26004337), provides access to currency hedging solutions on competitive terms, close to market conditions. A dedicated specialist analyses your currency flows, your payment schedules, and your acceptable risk level to devise a strategy tailored to your business, whether for a one-off transaction or an ongoing hedging policy.

Do you have upcoming foreign currency payments or receipts? Speak with an OSolto expert to assess your foreign exchange risk exposure.

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What is your foreign exchange risk exposure level?

Answer the 5 questions below, tally your points (a = 0, b = 1, c = 2, d = 3), and discover your risk profile.

1. How often do you invoice or make payments in foreign currency? (a) Never/rarely (b) A few times a year (c) Every month (d) Several times a week

2. What is the average time between commitment (order, invoice) and actual settlement? (a) Immediate payment (b) Under 30 days (c) 30 to 90 days (d) Over 90 days

3. Have you ever noticed a discrepancy between the expected amount and the actual amount paid/received due to the exchange rate? (a) No, never noticed (b) Yes, a minor difference (c) Yes, a difference that affected the margin (d) Yes, multiple times, significantly

4. What impact would a 3 to 5% exchange rate fluctuation have on your next foreign currency settlement? (a) Negligible (b) Inconvenient but manageable (c) Real impact on the margin (d) Would compromise the profitability of the transaction

5. Have you ever implemented a solution to lock in an exchange rate in advance? (a) Yes, systematically (b) Yes, occasionally (c) No, but I am considering it (d) No, this is new to me

0-4 pts: low exposure. Your foreign currency activity remains marginal; keep this guide handy should your international operations grow. 5-9 pts: moderate exposure. A portion of your cash flow is already sensitive to exchange rates; a quick conversation with an expert can clarify whether a one-off hedge is appropriate. 10-15 pts: high exposure. Your margin or cash flow is directly exposed to currency movements—speak to an OSolto expert for a free 15-minute exposure analysis.

FAQ: currency hedging for SMEs

Can you make money on currencies through currency hedging? No, its purpose is to reduce uncertainty and protect a margin or a budget, not to make a profit from market movements.

Should you hedge 100% of your foreign exchange exposure? Not necessarily. The level of hedging depends on the visibility over future cash flows and the company's ability to absorb an unfavourable variation.

Can an SME set up currency hedging for a single transaction? Yes, currency hedging is not restricted to a comprehensive policy; it can be applied to a single transaction, such as a one-off supplier payment.

What is the difference between a forward contract and a currency option? A forward contract sets an obligation: the rate is guaranteed and applied no matter what happens. A currency option grants a right without an obligation, in exchange for a premium payment, allowing you to benefit from favourable movements while remaining protected against adverse ones.

How much does currency hedging cost for an SME? The cost depends on the chosen instrument: a forward contract generally has no direct fee beyond the agreed rate, whereas a currency option involves paying a premium. OSolto assists you in identifying the solution best suited to your budget and risk exposure.