Hedging currency risks

If you trade goods, services or capital internationally, you can’t afford to ignore currency fluctuations. UBS offers several options for hedging against exchange rate risks.

Analyzing currency risks

Before you can start to hedge your risks, you first have to analyze the sources of potential currency-related losses.

With UBS, you can draw on the global foreign exchange expertise of Switzerland's largest financial services company:

  • You have access to a wide selection of innovative offerings
  • You can rely on internationally recognized world-class research
  • You benefit from direct access to the international markets

Advice & contact

      

Hedging: instruments for covering risks

The overview below shows a selection of hedging instruments and products that are also suitable for SMEs, and can be tailored to your personal level of risk tolerance.

Hedging Instruments

Regular cash flows, e.g. in USD, can be hedged on a monthly rolling basis with a USDCHF Cancellable Forward. This product, which is generally structured so that half is for a fixed period of time and half for a cancellable term, lets you hedge USD against CHF at favorable conditions simply and efficiently. This gives you flexibility regarding the amount hedged in each case and the term of the product.

Example: USDCHF seller
The Cancellable Forward has two terms: a fixed and a cancellable term. During the fixed terms, you have periodic FX forward hedges. During the cancellable periods, you sell USD and buy CHF only if the USDCHF is at or above a predefined rate. If the USDCHF is below the predefined rate on an interim expiry date, UBS will cancel the FX forward for this 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 don’t pay any premiums
  • You may restructure or close the Cancellable Forward at any time at market conditions

Risks:
The cash flows are not guaranteed for the cancellable period. Should cash flows occur during the cancellable period, they will be based on an exchange rate that is less favorable than the current spot rate.

If you’re anticipating a sideways trend in the USDCHF exchange rate, for example, and wish to hedge your USD currency risk efficiently, you can implement this market expectation effectively 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 initially have a long position on a forward (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 Reset Forward Rate will be used instead of the Initial 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 don’t pay any premiums
  • You may restructure or close the Range Reset Forward at any time at market prices

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

A USDCHF Kick into Forward offers you full hedging of your USD currency risk without you having to pay a premium, plus conditional participation in favorable rate movements. As long as the USDCHF exchange rate never reaches a certain rate level (kick-in level), you benefit from a USD rate that is above the current forward market rate.

Advantages:

  • You benefit from any advantageous rate performance in the underlying, up to the kick-in level
  • You are fully hedged at the worst-case rate (strike) at all times
  • You don’t pay any initial premiums
  • You may restructure or close the Kick into Forward at any time at market conditions

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

As a conservative hedging instrument, a Risk Reversal offers complete protection against currency losses. At the same time, the product lets you 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 price (= cap level) define a range within which you can sell USD and buy CHF at the spot rate at maturity, and this might be a better rate than the current market forward rate. If the spot rate at maturity trades below the lower strike, you sell USD against CHF at the lower strike. If the spot rate at maturity trades above the upper strike, you sell USD against CHF at the upper strike.

Advantages:

  • You are fully hedged at a known worst-case rate at all times
  • You benefit from any advantageous market performance of the underlying asset up to a cap level
  • You don’t pay any premiums
  • You may restructure or close the Risk Reversal at any time at market conditions

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

Use this when you want 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, with an obligation to buy back this amount (at forward conditions) on a specified date in the future.

Advantages:

  • Simple product
  • You are fully hedged at the agreed rates

Use this when you want 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)

      

Contact our experts

Since some of the currency products described here are highly complex, it's worth talking to your UBS client advisor to find the solution that is exactly right for you.