What is this thing called “Hedging”?
“Hedging” sounds extremely complicated. Like a word used in very small circles – only the select few “in the financial know”. And for those of us seemingly looking from the outside in, “hedging” – on the face of it at least – seems to be a little “over our heads”, a little convoluted and a little circumspect.
And that is not how we like dealing with things at Kuda FX.
After all, the very purpose of our articles is to give you industry knowledge, because at Kuda FX, we believe that knowledge is power..
So, let’s get right into it – what exactly is hedging?
What does hedging mean?
Investopedia defines hedging as –
“Hedging with forex is a strategy used to protect one’s position in a currency pair from an adverse move. It is typically a form of short-term protection when a trader is concerned about news or an event triggering volatility in currency markets. There are two related strategies when talking about hedging forex pairs in this way. One is to place a hedge by taking the opposite position in the same currency pair, and the second approach is to buy forex options”.
That all sounds well and good but… it’s so highfalutin. Are they saying hedging is a type of “protective instrument”?
Well, kind of. We explain hedging at Kuda FX as follows –
“refers to the practice of using financial instruments or strategies to reduce or eliminate the potential risks associated with currency fluctuations. The goal of hedging is to protect your business from losses caused by unexpected changes in exchange rates”.
And that makes perfect sense.
Almost like a type of “insurance”. Any anyone can get behind that. Especially when you’re talking about your own hard-earned money.
With Kuda’s origins lying in the niche insurance industry, our hedging team (likewise) brings that same niche expertise to hedging.
But there is a little more to hedging than just it’s definition. So, we thought we would rope in one of our very own hedging experts, the currency and treasury Manager at Kuda FX who is also responsible for the newly acquired Hedging Team at Kuda FX, to explain hedging in a little more detail…
In conversation with PR Nel
First, a little about the Kuda FX Hedging Team
Kuda FX has a wealth of expertise, experience, and resources, with a team made up of some of the most talented professionals in the field – if we do say so ourselves. We have the latest and most advanced technology and tools at our disposal, with which we manage our client’s currency risks effectively.
We’re committed to providing our clients with a comprehensive and personalised service, focused on delivering the highest level of advice, support, and active risk management. We believe that effective hedging requires a deep understanding of our clients’ business objectives, budget, and risk tolerance, as well as the latest insights and trends in the currency markets.
We pride ourselves on delivering exceptional tailored solutions to each individuals’ specific needs. And that’s our stand out component.
How does hedging at Kuda FX work?
It’s all about fluctuations in exchange rates. And this will have a significant impact on those that deal with exchange rates on a daily basis. Take someone who is in the import/export business as an example.
For our exporter clients, we understand that fluctuations in exchange rates can significantly impact their export revenues. To address this, we can help them enter into forward contracts with our bank – Investec – to lock in the exchange rate at the time of the contract. This guarantees a fixed price for goods in their local currency, eliminating the uncertainty and volatility associated with exchange rate movements. Clients can therefore plan and forecast their cash flows more efficiently.
Similarly, for our importer clients, we know that fluctuations in exchange rates can impact their import costs. To address this, we help them enter into currency futures contracts, which allows them to lock in the exchange rate for a specific time period. This eliminates the risk of adverse currency movements during that period. Helping clients manage their cash flows, plan their expenses, and protect their profits, more effectively.
What sets Kuda FX apart from other firms?
We understand that each client’s circumstances are unique, and no hedging strategy can eliminate all risks. Unfortunately.
But our team of experts at Kuda FX work closely with our clients to assess specific currency risk exposure, so that we can understand individual goals and objectives. Once we have undertaken a full analysis, we’re only then able to recommend the most appropriate hedging solution to meet specific needs.
At Kuda FX, we consider ourselves true partners, working hand-in-hand with our clients, supporting, and advising them on their specific needs and objectives as they continue on their journey.
What specialities does Kuda FX offer clients?
Firstly, Kuda FX offers a comprehensive suite of foreign exchange hedging solutions together with specialist advice and support, alongside access to a state-of-the-art treasury system, truly setting us apart.
At the core of Kuda FX’s service is active risk management, utilising both fundamental and technical analysis to ensure that our clients have access to the latest insights and trends in the currency markets. This is complimented by up-to-date news and analysis of key economic and political events that could impact currency movements.
By partnering with Kuda FX, clients can be rest assured that they have a reliable and knowledgeable partner that will work closely with them to develop and implement a tailored hedging strategy that aligns with their particular business objectives and budget.
How does Kuda FX mitigate risk?
There are three strategies that we implement –
- Swaps: a swap is an agreement between two parties to exchange cash flows based on a specific set of criteria. Swaps can be used to hedge against interest rate risks, foreign exchange rate risks, and commodity price risks.
- Forward contracts: a forward contract is similar to a “futures contract”, but it’s not traded on an exchange. Instead, it’s a private agreement between two parties to buy or sell an underlying asset at a predetermined price and date in the future.
- Collars: a collar is a combination of options contracts that sets both a floor and a ceiling on the price of an underlying asset. Collars can be used to hedge against price movements in the underlying asset while limiting potential gains or losses.
Hedging instruments can help investors and businesses manage risk and limit their exposure to potential losses in volatile markets. However, it’s important to note that hedging strategies can also limit potential gains, and they may not always be the best approach for every situation. It’s therefore – very much – on an individual case-by-case basis.
Ultimately, we believe that Kuda FX’s value proposition is unmatched in the FX industry and we’re confident that our services will deliver real value to any business seeking to manage their foreign exchange risks.
With all the above in mind, we encourage you to get in touch with a Kuda FX professional, like our team at Kuda FX who would be happy to explain the above concepts in further detail or provide any other assistance you may require with your specific hedging needs.
In fact, if you have any queries on the information, we have set out above, please feel free to get in touch with us.