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?
Foreign exchange hedging consists of fixing today the exchange rate that will be applied to a future currency transaction, such as a supplier payment or a customer receipt. Rather than being subject to the spot rate at the time of payment, the business knows in advance, as soon as the hedge is put in place, the exact amount it will pay or receive.
The aim is not to speculate on currency movements, but to secure a margin, budget or cash flow that is already committed to a commercial transaction.
A concrete example
A company needs to pay USD 100,000 in two months. At the time of ordering, the EUR/USD 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 climbs to 95,238 euros, a loss of more than 4,300 euros on this single transaction. With a hedge put in place from the moment the order is placed, the rate of 1.10 remains guaranteed, regardless of the market rate at the time of payment.
The same risk exists on the receipt side. An exporting SME invoicing USD 50,000 to an American client, payable within 60 days, suffers the opposite movement: if the dollar depreciates between now and the due date, the amount received in euros decreases by the same amount, without the negotiated commercial margin having changed. 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 rate decisions. For an SME that settles several tens of thousands of euros in supplier invoices per month in foreign currency, 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 range observed over a two- to three-month billing cycle.
Who is affected
Foreign exchange hedging concerns any business making payments or receipts in foreign currency: importers, exporters, e-commerce businesses with suppliers abroad, travel agencies paying international providers, or service companies invoicing clients outside the eurozone. 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
A forward contract allows a rate to be fixed for a date and an amount known in advance; it is the most widely used instrument by SMEs. A 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 share of participation in favourable market movements.
Mistakes to avoid
Waiting for the right time to hedge is the most common mistake: currencies move unpredictably, and the goal is not to guess the market but to reduce uncertainty. Hedging too small a share of one's exposure is another classic mistake, which leaves a significant part of the risk unmanaged. Finally, failing to monitor one's hedged position over time — maturities, guaranteed rates, remaining amounts — exposes the business to unpleasant accounting surprises at the time of settlement.
How OSolto supports you
OSolto, a payment intermediary authorised by the ACPR and registered with ORIAS, provides access to currency hedging solutions under competitive conditions close to market conditions. A dedicated contact person analyses your currency flows, maturities and acceptable risk level to define a strategy adapted to your business, whether it is a one-off transaction or a regular hedging policy.
Do you have upcoming payments or receipts in foreign currency? Talk to an OSolto expert to assess your exposure to foreign exchange risk.
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What is your level of exposure to foreign exchange risk?
Answer the 5 questions below, count your points (a = 0, b = 1, c = 2, d = 3) and discover your risk profile.
How often do you invoice or pay in a foreign currency? (a) Never/rarely (b) A few times a year (c) Every month (d) Several times a week
What is the average time between the commitment (order, invoice) and the actual settlement? (a) Immediate payment (b) Less than 30 days (c) 30 to 90 days (d) More than 90 days
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 discrepancy (c) Yes, a discrepancy that affected the margin (d) Yes, on several occasions, significantly
What impact would a 3% to 5% variation in the exchange rate have on your next currency payment? (a) Negligible (b) Annoying but absorbable (c) Real impact on the margin (d) Would call into question the profitability of the transaction
Have you ever put in place a solution to fix an exchange rate in advance? (a) Yes, systematically (b) Yes, occasionally (c) No, but I'm thinking about it (d) No, I'm new to the subject
0-4 pts: low exposure. Your foreign currency activity remains marginal, keep this guide handy if your international flows grow. 5-9 pts: moderate exposure. A portion of your cash flow is already sensitive to the exchange rate, a quick discussion with an expert can clarify if a one-off hedge is relevant. 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 analysis of your exposure.
FAQ: currency hedging for SMEs
Does currency hedging allow you to make money on currencies? No, its objective is to reduce uncertainty and secure a margin or budget, not to make a profit on market movements.
Do you need to hedge 100% of your foreign exchange risk exposure? Not necessarily. The level of hedging depends on the visibility of future flows and the company's ability to absorb an unfavourable variation.
Can an SME put in place a currency hedge for a single transaction? Yes, foreign exchange hedging is not reserved for a global 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. A currency option gives a right without an obligation, in exchange for the payment of a premium, allowing you to benefit from a favourable movement while being protected from an unfavourable one.
How much does currency hedging cost for an SME? The cost depends on the instrument chosen: a forward contract generally has no direct cost beyond the fixed rate, whereas a currency option involves paying a premium. OSolto supports you in identifying the solution best suited to your budget and exposure.
