Indeed, it is not possible to know with certainty how the exchange rates will evolve: it is not possible at one year, it is not possible at one month, and it is not even possible at 1 hour.
1. Launching a hedging strategy
No need to resort to complex instruments that no one understands except the bank that sold them to you.
A hedging strategy must be simple and diversified using instruments that are all perfectly understood by the manager.
A diversified hedging strategy consists in hedging between 25 and 50% of the total exposure at launch. The use of firm instruments (futures contracts) and zero-premium option tunnels is to be preferred :
– the firm instruments provide total security but do not offer any flexibility.
– the options provide security (less attractive price than the term) but offer flexibility to benefit from a possible favorable price evolution.
Combining the two types of instruments therefore allows, without cost, to combine security and flexibility.
The hedging instruments implemented in the initial strategy are not sufficient to cover the entire exposure: the open position (in other words, the portion of the total exposure that is not covered by hedges) must then be managed dynamically.
2. Management of the open position
The management of open position is essential but it is also the most difficult to implement.
Hedging allows us to know precisely the performance of a part of the exposure, but it is not enough to know what the overall performance of a position will be if it is not combined with active management of the open position.
Active management of the open position involves positioning intervention levels in the event of unfavourable price trends (“stop-loss“) but also in the event of favourable trends (“take-profit“). If an intervention level is reached, additional firm or optional coverage is processed. In all cases, managing the open position makes it possible to know at any given moment what the overall performance of the hedging strategy will be, regardless of whether prices evolve favourably or unfavourably.
Portfolio diversification and management of the open position enables the manager to achieve his management objectives. The two main advantages of such a strategy are :
– seizing market opportunities if the spot price evolves favorably;
– having a greater capacity to adjust the strategy when the exposure changes (especially in the event of a reduction in the projected budget).
DeftHedge provides companies with the tools that match their ambitions to manage their foreign exchange risk. DeftHedge meets the needs of managers whether or not they have an anticipatory approach to risk management.
The DeftHedge solution