Currency hedging is speculative and risky.
#1: Currency hedging is speculative and risky.
Public perspective of hedge funds must be the reason for this misplaced assumption. In actual fact, currency hedging and hedge funds have less in common than you’d think.
Unlike hedge funds, which essentially use loans to make bets on what might happen in markets (speculative, risky), currency hedging is part of a strategy, based on known variables and a defined goal, to protect a business from foreign exchange (FX) losses. Hedge funds are designed to take on market risk, whereas currency hedging minimizes risk from exchange rate volatility.
The objective of currency hedging is not to maximize profits through currency speculation but rather to minimize the risk that your company is exposed to. A currency strategy can involve making an informed decision to do nothing. It can also consist of partial or full protection, which offer the ability to benefit from positive market changes while protecting from negative ones. A hedging strategy is essentially an insurance policy against the adverse effects of currency fluctuations and economic conditions that are out of your control. In the same way you would insure your business from fire or theft, hedging insures your company’s currency assets from unforeseen changes in the global foreign exchange market.
Currency hedging ensures that the success of your business is determined by its operations and not unpredictable economic factors and volatile currency rates. It acts as a stabilizing mechanism which allows a company to project future cash flows – the valuation and reporting requirement for most businesses – with better certainty. Currency hedging involves proactively taking measures to offset uncertainty in international markets, exchange rates, or a respective country’s economic strength.