Forex Blog: Currency Trading News & Analysis.

February 7th 2006

Small firms avoid currency hedging

As financial markets grow increasingly sophisticated, individuals and businesses are now able to insure themselves against most conceivable risks. Specifically, as forex markets have grown more volatile in the last decade, many businesses have begun to hedge against the risk of rapid currency appreciation/depreciation. An array of financial products can be used towards this end, including options, forwards, futures, and swaps. The principal tool used in currency hedging continues to be currency futures, in which one party agrees to buy/sell a fixed amount of a given currency at a fixed exchange rate, on a fixed date in the future. While most large corporations now have entire departments devoted solely to hedging and risk management, small firms lack the resources necessary to engage in currency hedging. Anecdotal evidence suggests that small firms that import/export simply hope that relative changes in currency values balance out in the long run. This is a risky strategy, as the Times Online reports:

If the currency strengthens the price of the goods increases, making it difficult for companies to plan accurate revenue forecasts and ultimately putting stress on cashflow. Exporters selling into foreign markets face the risk of the currency weakening.

Read More: Currency game is risky for the smaller players

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Posted by Adam Kritzer | in Futures, Investing & Trading | No Comments »

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