The COVID pandemic has already impacted our economy for the past year. As we roll into 2021 and continue to be affected by the pandemic, the only thing we can know for certain is that we don’t know what the future will bring.
One of the big effects from last year was the highly volatile markets, both downward and upward. We’re already experiencing high volatility in 2021.
No matter what happens in the future, businesses need a plan to manage risk. Proactive businesses are implementing strategies and solutions that will help minimize risk and free up cash flow in their operations.
Hedging to Protect Your Business
Depending on the type of business you’re in, you may have situations where strategic hedging can protect you from rate fluctuations. One example is for businesses that have longer payment terms, such as 30, 60, 90 days, or more. These payment terms might help your business with cash flow in the short term, but they must be managed correctly. Rate fluctuations that move against you can cost your business substantially more than what was initially projected.
This is also the case when you accept longer payment terms. Rates moving against you can negatively impact your profit margin and even wipe it out.
What can you do? It’s not necessary to substantially change your business. By adding some hedging strategies and tools, you can continue to operate as normal, while protecting against the effects of wild rate fluctuations. Here are three common hedging strategies to look at.
Forward Contracts: Lock in Today’s Rates for the Future
The first strategy is forward contracts. Many businesses use these like an insurance policy. A forward contract allows you to lock in today’s spot rate for a specified amount of currency at a future time.
These are especially useful for businesses that forecast payables into the future. If a payment is coming in 90 days from now, there can be a lot of fluctuation in the currency market between now and then. But by locking in a rate today, you can plan for profits while protecting against market volatility.
Multi-Currency Accounts: No Need for International Bank Accounts
The second strategy is multi-currency accounts. These accounts allow you to buy currencies at a good rate and hold them in the account for future payments.
An important distinction is that multi-currency accounts are not the same as international bank accounts. Like the name implies, multi-currency accounts let you make or receive payments in multiple currencies. You can continue to hold the currency without exchanging it, so if the market rate goes against you, you can wait until it’s favorable again, or simply use the currency as it is.
Multi-currency accounts are less cumbersome to set up than international bank accounts and are a good option for cash-rich businesses with a surplus of liquidity.
Market Orders: Trade Any Time the Market is Favorable
The third strategy is market orders. They are useful for businesses with larger built-in margins, such as international lawyers or beverage importers, to use to trade currencies at favorable rates. Market orders let them take advantage of short-term fluctuations.
With a market order, you place an order to execute at a specified target rate for a currency, rather than on a specific date. If the market rate hits your specified rate, at any time of the day or night, an automatic trigger goes out to the market to buy (or sell) that currency for you.
The order executes automatically, allowing you to take advantage of news-based fluctuations that only last for a few minutes. The order will happen when the market meets your specification, even if you’re not watching. They remain in effect either until they reach the expiration date that you set, or until you cancel them.
What’s Your Strategy?
As much as we all hope this wild ride is over soon, we don’t have any idea when the economy will return to normal. In order for your business to thrive through this volatility, you need to have a risk management strategy. Even if you ignore the current economy, you’ve actually implemented a strategy: you’ve made the choice to ride the volatility wave, crossing your fingers for luck and hoping nothing bad happens.
Rather than expecting the worst and waiting for it to happen, you can be proactive and prepare by trying to use the market movements to your business’s advantage.
The tools above are just some of the strategies you can use to minimize risk, protect your profit margins, and free up cash flow. In addition to these tools, it’s important to note WHO is watching your back when you’re trading currencies. The experts at TEMPUS can help you select and implement the strategies to protect your business.
Ready to hedge to protect your bottom line with our award-winning trading team?
