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Risk management priorities: Why hedging currency risk is as important as securing a fixed-term mortgage

Fixed-term mortgages and currency risk hedging share striking similarities in their fundamental risk management objectives and mechanisms – but they couldn’t be more different when it comes to their perceived value. Any business that’s buying premises wouldn’t think twice about locking in favourable repayment terms, so why are they so remiss when it comes to managing exchange rates?

Financial risk is an inevitable consequence of doing business. This is exacerbated for organisations with an international footprint amid exposure to an unpredictable force that can pull their finances back and forth: currency risk.

When it comes to ranking financial risk management priorities, however, this serious threat is often an afterthought for small and medium-sized enterprises (SMEs), despite the instruments and strategies available to manage it – leaving the value of their international commitments at the mercy of fluctuating rates.

This oversight is amplified by the parallels that can be drawn between hedging currency risk and another, more popular, financial risk management measure: securing a fixed-term mortgage.

Hedging currency risk and fixed-term mortgages: the parallels

While fixed-term mortgages and currency risk hedging are distinct financial strategies tailored to different contexts, they both serve the broader purpose of managing financial risks to achieve stability in financial planning and decision-making. The fundamental similarity between the two lies in their ability to empower businesses with control over two different types of rates.

Securing a fixed-term mortgage helps businesses manage interest rate risk by locking in a predetermined rate for the duration of the loan, shielding them from potential fluctuations in borrowing costs and ensuring predictable monthly payments.

Hedging currency risk involves using financial instruments, like forward contracts and options, to mitigate the potential adverse effects of exchange rate fluctuations on transactions denominated in foreign currencies by securing a current rate.

By mitigating financial risk, both provide certainty and stability over a specified period, elevating long-term financial planning in the process. By securing a fixed-term mortgage, businesses can plan their budget more effectively, knowing their monthly mortgage payments will remain constant. Similarly, hedging currency risk allows businesses engaged in international trade to plan and budget more accurately by minimising the impact of currency volatility on their financial performance.

Why is hedging currency risk not a priority?

Unlike large organisations, SMEs don’t have the resources to implement a dedicated in-house treasury team that focuses on managing their currency risk exposure, or the finances to absorb sudden losses. Consequently, they don’t prioritise tailored hedging strategies amid an erroneous belief that they’re too complicated, time-consuming, and expensive.

Meanwhile, securing a fixed-term mortgage is a common practice that isn’t associated with entrenched barriers. However, when you break it down, the process of obtaining one is typically more complicated and time-intensive than hedging currency risk – from researching lenders and getting pre-approval to formally applying and navigating the underwriting process.

Because those responsible for treasury management in an SME typically juggle several roles, they are often time-poor when it comes to developing and executing a bespoke hedging strategy or don’t understand the intricacies of doing so – but help is available.

Exchange rates: a new risk management priority

Like securing a fixed-term mortgage, hedging currency risk requires careful consideration to capitalise on favourable market conditions. Rather than relying on potentially inaccurate currency market forecasts or simply hoping that exchange rates shift in your business’s favour, you can give these market movements the attention they require by working in partnership with Lumon.

We can help you safeguard your business from adverse shifts in currency values and provide certainty in international transactions by mirroring the function of a large in-house treasury team. We will work in partnership with you to achieve transparency and stability by tailoring, implementing and reviewing a hedging strategy that leverages solutions that align with your business’s risks and goals.

Our step-by-step approach underscores how straightforward the hedging process can be with the right guidance:

  1. We augment our technical currency market know-how by providing a relationship-led service, so we can gain a deep understanding of your company’s exposures, pain points, risk appetite, and any other variables that influence its objectives.
  2. Using this knowledge and empathy, we help to develop a tailored strategy that aligns with the level of risk you’re exposed to and seeking protection from. The solutions that underpin this allow you to secure a specific exchange rate for future transactions, providing certainty and stability in financial planning.
  3. We support the implementation of the strategy, ensuring trades are executed in line with the predetermined parameters and rules – removing risky emotion-led decisions from the equation.
  4. We provide in-depth analysis and real-time market insights throughout the life of the hedge – allowing you to gain ongoing certainty in your financial operations.
  5. Our dealers analyse and report on the performance of the strategy, allowing it to evolve with the dynamic business and economic environment.

Like securing a fixed-term mortgage when purchasing premises, hedging currency risk should be your business’s default option when managing exchange rates. With Lumon in your corner, you can gain a firm footing within the currency markets without needing vast resources.