Hedging currency risk

Is your business involved in the international trade in goods, services or capital, and would you like to hedge your operations against the risks of currency fluctuations? If you cannot invoice your goods or services in Swiss francs or if your imports are paid for in foreign currencies, you will be confronted by currency fluctuations.

Before you take the step of hedging this risk, you need to analyze the source of potential currency-related losses.

With UBS, you will be able to draw on the global foreign exchange expertise of the biggest Swiss financial services company.

We offer you a wide selection of innovative products and services combined with the support of an internationally recognized research team and direct access to global markets.

Based on your risk appetite, the following overview presents a selection of instruments and products especially suited to SMEs.

Regular cash flows, e.g. in USD, can be hedged on a monthly rolling basis by means of the USDCHF Cancelable Forward. This product, half of which is generally structured into a fixed period of time and half into a cancelable period, enables you to hedge USD against CHF at favorable conditions simply and efficiently. In return, you are flexible with regard to the amount that is hedged in each case and the term of the product.

Example: USDCHF seller
The Cancelable Forward has two periods: a fixed and a cancelable period. During the fixed periods, you have periodic FX forward hedges.
During the cancelable periods, you sell USD and buy CHF only, if USDCHF is at or above a predefined rate. In case USDCHF is below the predefined rate on an interim expiry date, UBS will cancel the FX forward for that period.

Advantages
You can hedge USD at a better rate than the forward market rate.
You can hedge your regular cash flows more easily and efficiently.
You do not pay any premiums.
You may restructure the Cancelable Forward or close it at any time at market conditions.

Risiken:
Die Cashflows für die kündbare Zeitspanne sind nicht garantiert. Sollten innerhalb der kündbaren Zeitspanne Cashflows fließen, liegt diesen ein Wechselkurs zugrunde, der gegenüber dem aktuellen Kassakurs unvorteilhafter ist.

On the basis of a sideways trend in the USDCHF exchange rate, for example, you would like to hedge your USD currency risk efficiently. You can implement this market expectation efficiently with a Range Reset Forward. As long as the USDCHF rate remains within a predefined range, you benefit from a favorable forward rate.

Example: USDCHF Seller
You have initially a long position on a forward to sell USD buy CHF at a better rate than the current market forward rate.
If spot trades are at or outside a predefined range at any time during the lifetime of the structure, the Initial Forward Rate will be reset to the Reset Forward Rate.

Advantages
You benefit from a sideways trend in the underlying asset.
You are fully hedged at a worst-case rate (= reset rate) at all times.
You do not pay any premiums.
You may restructure the Range Reset Forward or close it at any time at market prices.

Risks:
If the price moves above or below the price range limits, you trade the currency at a slightly less favorable price (worst-case price) than the reference forward rate.

For example, a USDCHF Kick into Forward offers you a conditional participation in profitable price movements in addition to full hedging of your USD currency risk without paying a premium. As long as the USDCHF exchange rate never reaches a certain rate level (kick-in level), you benefit from a USD rate that lies above the current forward market rate.

Advantages
You benefit from any advantageous rate performance of the underlying asset, up to the kick-in level.
You are fully hedged at the worst-case rate (strike) at all times.
You do not pay any initial premiums.
You may restructure the Kick into Forward or close it at any time at market conditions.

Risks:
If the kick-in level is touched, you trade the currency at a slightly less favorable price than the reference forward rate (worst-case price).

As a conservative hedging instrument, Risk Reversal offers complete protection against currency losses. At the same time, the product enables you to participate in any favorable market performance of the underlying asset, up to a certain cap level, without paying a premium.

Example: USDCHF Seller
A lower and an upper strike (=cap) define a range within which the client can sell USD buy CHF at spot at expiry, which can be at a better rate than the current market forward rate. If spot at expiry trades below the lower strike, the client sells USD against CHF at the lower strike.
If spot at expiry trades above the upper strike, the client sells USD against CHF at the upper strike.

Advantages
You are fully hedged at a known worst-case rate at all times.
You benefit from advantageous market performance of the underlying asset up to a cap level.
You do not pay any premiums.
You may restructure the risk reversal at any time at market conditions or close it.

Risks:
The worst case rate (lower strike for a seller resp. upper strike for buyer) is worse than the forward reference.

You would like to hedge your foreign currency risks in a simple way by immediately exchanging a sum of money into another currency at the current exchange rate, linked to buying back this amount (at forward conditions) on a specified date in the future.

Advantages
Simple product.
You are fully hedged at the agreed rates.

You would like to hedge your foreign currency risk in a simple way up to a predetermined worst-case exchange rate. This is done by exchanging a sum of money into a different currency on a particular date (or within a particular timeframe) in the future at a predetermined exchange rate.

Advantages
Simple product.
You are fully hedged at the agreed worst-case rate (strike).

Since some of the foreign exchange products listed here are complex, it is worth talking with your UBS client advisor in selecting a suitable solution.