Currency hedging for businesses: tips and strategies

Some companies exchange foreign currencies the moment the money comes in or an invoice needs to be paid, others only when they receive or place an order. Still others enter into forward transactions that are effective the date payment is due. Anyone who does frequent or even regular business abroad should seek professional advice to determine the appropriate foreign exchange hedging strategy.

Many companies in Switzerland do business with suppliers or clients abroad. They buy materials, semi-finished products or machines in euros or US dollars, for example, and receive payment for their own products and services in euros or dollars. Depending on the scope of services or the amount, even small exchange rate fluctuations can have a positive or negative impact on the profit margin.

Not having a currency strategy for this can be dangerous and cost a lot of money. Those responsible often lack the time or knowledge to deal with this, and they underestimate the associated risk. Moreover, some are reluctant to confront what they consider a supposedly “complex” matter.

We’re living in uncertain times in many respects, as can be seen from the volatile interest rate and currency markets. Without hedging currency risks, medium- to long-term financial and earnings planning becomes considerably more difficult, as costs and revenues are exposed to unpredictable exchange rate fluctuations. Profits generated can evaporate overnight due to short-term exchange rate shifts. Companies without active foreign currency management are sometimes less competitive internationally because they are less able to calculate and offset price risks. 

It pays to analyze the impact of currency fluctuations on your bottom line. It then becomes apparent how significantly exchange rate fluctuations of just 1 to 2% can affect business results when gross margins are thin. Hedging also contributes to budget and balance sheet certainty. As a financial partner and advisor, it is UBS’s job to closely examine companies’ value chains and work with them to find solutions for secure foreign currency management.

In principle, this is a sound strategy, as it reduces the risks associated with the impact of foreign currencies on business results. With natural hedging, you adjust your value chain so that expenses and revenues in a foreign currency balance each other out. For example: Your clients pay you around EUR 2 million per year. To avoid having to convert this sum into CHF, try to find suppliers in the eurozone so that you can pay them in euros, also for a total amount of around EUR 2 million. This allows you to avoid currency exchange and, in theory, means you no longer need to do any further hedging. Since these currency flows rarely balance completely in reality, an additional currency hedge is still worthwhile.

However, not every company can hedge naturally because the procurement, transformation and sale of goods and services do not take place within the same currency zone. Often, there is also a surplus or deficit in currencies, which must then be hedged anyway. 

A company in Switzerland that purchases in euros (EUR) and sells in US dollars (USD) is embedded in two currency zones and consequently bears a triple exchange rate risk (EUR/CHF, USD/CHF and indirectly EUR/USD).

Simple forward transactions are a frequently used hedging instrument. In doing so, you agree to a binding exchange rate for the purchase or sale of foreign currency at a specified future date.

These transactions can be designed with more attractive conditions or greater flexibility if they’re supplemented with time-based options. UBS Flexible FX Forward offers a highly effective and simple solution for this. 

Companies with a little more experience in foreign currency transactions can pursue an even more customized currency strategy with foreign exchange hedging products tailored specifically to their needs. These range from somewhat conservative to opportunistic to performance-oriented. We also offer a wide range of attractive solutions for different needs.

UBS Flexible FX Forward helps companies by combining flexibility and planning security in currency hedging. Companies can set an exchange rate in advance and flexibly draw down the hedged amount in full or in several installments until the end date, depending on their liquidity needs. The hedged amount can easily be drawn down or delivered via E-Banking. This form of hedging is particularly useful if you cannot commit to a payment date yet or do not want to.

You can find more information in our factsheet or get direct support from your UBS advisors.

We provide currency management advice to companies as part of a comprehensive strategy discussion. We work together with you to analyze the impact of foreign currencies on the value chain and the effects on business results. We also discuss hedging requirements and clarify which channels should be used to conduct foreign exchange transactions. A foreign exchange strategy like this offers companies planning security and protects them from unexpected budget and balance sheet fluctuations. With professionally structured currency hedging, companies can protect themselves against exchange rate fluctuations and concentrate on their core business.

More about currency hedging from UBS – or speak directly with your UBS advisor.

We recommend that every company exposed to foreign currency obtain a detailed overview of the possible effects of foreign currencies on their bottom line. Ask your bank advisor how you can hedge against exchange rate risks to protect your margins and optimize your liquidity planning.

Act before it’s too late! If it looks like rain, take an umbrella with you. The same is true of exchange rate fluctuations, which can also happen at any time.