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SystematicEdge releases thought piece on FX hedging amid supply chain uncertainties

2 Key Features to look for in a Currency Risk Hedging Solution


Today’s challenges

The Covid-19 pandemic has disrupted supply chains in many industries, with bottlenecks on suppliers’ side, clients postponing orders, and a host of logistical challenges. As a result, companies that hedged their currency risk with traditional solutions often found themselves in a situation where previously negotiated contracts with banks or other FX providers were not flexible and needed to be renegotiated at great cost if change was possible at all. That is why, in today’s uncertain supply chain environment, it is paramount for companies to choose a partner that can design a flexible FX hedging program. When comparing hedging solutions, there are two main features to look for to ensure it will be flexible and cost-efficient enough to meet your needs.


What to look for in a flexible FX hedging program


Feature #1: Flexible dates

Imagine your client is postponing a payment in foreign currency or your supplier is requiring an earlier-than-expected deposit payment to secure production. These are scenarios we often see with our clients. In order to meet these challenges, the hedging program must give you the flexibility to change future FX conversion dates according to your company’s dynamic business environment.

Solution: Look for a hedging program that allows your conversion schedule to be changed if needed. You may also secure an FX rate valid for all conversions throughout the year or a series of monthly conversion rates valid for 30 days.

Real-life example: 

One of our Hong Kong-based clients hedged its yearly RMB payments to Chinese suppliers against HKD at a fixed conversation rate at the beginning of the year. Due to Covid-19-related disruptions, the company had to reschedule some of its RMB payment to next year. Thanks to our flexible solution, we were able to adjust the hedge accordingly at the same fixed conversation rate at no extra cost. 

Feature #2: Flexible amounts

Imagine your client is temporarily reducing order amounts or your supplier is unexpectedly raising purchasing prices. Again, situations we see all too often with our clients. In order to manage through these situations, the hedging program must give you the flexibility to adjust conversion amounts when needed.

Solution: Look for a hedging program that gives you the possibility to cancel part of the hedge at no extra cost if conversions are no longer needed.