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FX Forwards and Risk Management


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Why Use Foreign Exchange Hedging for Your Business?

Participating in the global market on any scale can bring great opportunities, while also introducing unique foreign exchange exposure. It is critical to devise a plan that mitigates FX volatility risk by stabilizing cash flows and protecting budgeted rates. Hedging can be likened to an insurance policy that protects against the impact of foreign exchange risk. Forward contracts often form the backbone of foreign exchange hedging strategies for both large corporations and small businesses alike.

Customize Your Foreign Exchange Hedging Strategy to Fit Your Business

Having a strategy to handle your FX risk starts with identifying your exposure. From there establishing a policy and determining your budget exchange rates and target goals can inform you when to act and under what market conditions. When you approach your hedging strategy, determining which tools such as - Fixed-Dated Forwards, Open-Dated Forwards, FX Swaps, and FX Spot trades - should be deployed is important.

What are FX Forwards?

An FX Forward contract allows you to lock in the exchange rate for the purchase or sale of currency on a future date. This action protects you from foreign exchange rate fluctuations. EBC’s FX Forwards can have a value date of three business days up 365 days from the trade date. If the contract has a value date within two business days of the trade date on which you entered into the transaction, it is an FX Spot Deal.

How do FX Forwards work?

When you have a foreign invoice or other payable or a receivable that has a term (30, 60, 90 days or more), there is a likelihood that the price of that foreign currency will change during the term – either upwards or downwards. If you are a manufacturer and paying a supplier for parts and have to pay an invoice in Euro, an upward movement in the exchange rate would result in higher costs. However, if you are an exporter, this would result in foreign currency receipts being worth less. By using an FX Forward with Exchange Bank of Canada, you can lock in a Foreign Exchange Rate determined today for settlement at a future date to match the terms of your payable or receivable (Value Date).

Addressing the Top Foreign Exchange Concerns For Businesses in the International Marketplace:

  • Managing Against FX Market Volatility
  • Ensuring Profit Margins
  • Protecting Balance Sheets
  • Enhancing Cash Flow
  • Mitigating Foreign Exchange Exposure
  • Improving Company Positioning in International Markets
  • Affirming Competitive Pricing

FX Forward Benefits:

  • Determine the cost of foreign payments at the time you make a purchase
  • Protect profit margins on products and services sold abroad against adverse foreign currency fluctuations
  • Gain a competitive edge by quoting or selling products or services denominated in the local currency
  • Identity and reduce unprotected cash flow

What Type of Hedging Tools Can You Use for FX Forwards?

  • Fixed-Dated Forwards - The most common hedging tool, forward contracts fix a defined future (value) date at which to buy or sell a stated amount of currency at an agreed rate. The defined future date cannot be altered.
  • Open-Dated Forwards - This hedging tool offers the flexibility of an open time period in which to settle and deliver the currency. Open forwards allow you to draw down against the original amount contracted prior to the value date.
  • FX Swaps - The simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot and forward) is used to modify delivery obligations for Fixed-Dated Forwards.