Currency hedging: tips for SMEs

Martin Eng: It varies. Some SMEs exchange foreign currencies the moment the money comes in or an invoice needs to be paid. Others only when they receive or place an order. And still others enter into forward transactions that are effective the date payment is due.

Having no foreign exchange strategy can be dangerous and potentially cost a lot of money. Those in charge of executing a strategy often lack time or don't even know how to go about developing one. Moreover, some are reluctant to confront what they consider a “complex” matter, while underestimating the risk involved. 

It pays to analyze the impact of currency fluctuations on your bottom line. You then realize that when dealing with foreign exchange rates, shifts of just 1 to 2 percent with narrow gross margins can significantly impact business results. Additionally, hedging contributes to budget and balance sheet certainty. As a financial partner and advisor, it’s our job to take a close look at an SME’s value chain in terms of foreign currencies and work with them to find hedging solutions. 

This is a good strategy, in principle, because it reduces the risk of foreign currencies influencing your financial results. However, not every SME can hedge naturally because the procurement, transformation and sale of goods and services do not take place in the same currency zone. Often, there is also a surplus or deficit in currencies, which must then be hedged anyway.

Simple forward transactions are a frequently used hedging instrument. They can be designed with more attractive conditions or greater flexibility if they’re supplemented with time-based options. With our new product UBS Flexible FX Forward, we offer our clients a very effective solution for this.

As with an ordinary FX Forward (forward transaction), the holder is obliged to buy a foreign currency against CHF at the forward price. However, the client can also draw the nominal amount or partial amounts on any other valid reference date before the last possible reference date.

With a UBS Flexible FX Forward, our clients gain greater flexibility in their timeline. The exchange rate is fixed in advance. The hedged amount can be drawn or delivered in full or in individual tranches at any time before the actual maturity date. This form of hedging is particularly useful if you do not yet want to commit to the date of a payment or if the date of payment of the foreign currency cannot yet be fixed to a specific date. Find out more about UBS Flexible FX Forward here. 

We offer our corporate clients a strategic dialog about currency management. In our discussions with them, we examine the impact of foreign currencies on their value chain and conduct a sensitivity analysis in relation to financial results. We discuss the need for hedging and which channels should be used when handling foreign exchange transactions. Additionally, we clarify the information needs of our clients. The results of this dialog determine the approach taken to currency hedging and are reviewed annually.

We recommend that every SME that has contact with foreign currency obtain a detailed overview of the possible effects of foreign currencies on their bottom line. An in-depth review of this matter with a bank advisor is indispensable. If it looks like rain, take an umbrella with you. The same is true of exchange rate fluctuations: these, too, can happen at any time.