The WHY of Hedging
The WHY of Hedging:
Why you might or might not hedge depends on your business
As a business owner involved in import or export or both, your focus is more likely to be generating more sales, not worrying about where the USD/SGD is going or where EUR/USD is going.
To hedge…
To break it down simply, if you go down the ‘to hedge’ path, what do you get? You get certainty of gross margin and cashflows. You get reduction of volatility of income and you get ease of planning.
If you decide not to hedge, you might have an outcome that outperforms compared to if you had hedged. However, what you will get is uncertainty of gross margin and cashflow, and a potential increase in volatility of your income, which may make it more difficult to plan. If you don't know what your cashflow is going to look like over the next six months or you don't know how much profit you're going to have, it becomes very difficult to plan for the future.
Many businesses have fixed costs, such as overhead, and variable costs, such as sales revenue and the cost of goods sold. An adverse move in the currency—in your cost of goods or your sales revenues—can affect your gross profit margin adversely.
In this scenario, you may consider hedging to reduce income statement volatility and volatility of local earnings. It's as simple as that. If you want certainty, embracing the currency hedging path could be a good option. Another reason why you might hedge is to help protect cashflows which could help ensure your profitability stays consistent and predictable, and likewise, your cashflow.
Or not to hedge
There are a few circumstances where hedging might not be appropriate for you. Firstly, if you’re not 100% committed to creating and implementing your currency hedging strategy, you might not wish to hedge as there is a chance you will be unhappy with the outcomes. Secondly, speculative hedging is not supported by Corpay. Thirdly, if you have no FX risk due to the way you price your products/services, why would you create risk by hedging?
Lastly, if you don’t fully understand the product you’re using and the potential outcomes, don’t proceed: get more information and seek professional advice.
