Simplifying Passive Hedging
What is a Forward?
A forward contract is an agreement between you and another party (i.e. the bank) to exchange foreign currency at a future date; this means you can fix an exchange rate for 6-12 month periods and protect yourself from any big currency movements. All of our Forwards are flexible, so if you book a £300,000 forward for 12 months, you can use as much as you like as long as it’s all used by the expiry date (12 months).
What is it used for?
Forward contracts are good for businesses looking to protect their position with supplier invoices. Let’s say you have 90-day credit terms for a supplier in the USA; GBPUSD is at 1.40 and hasn’t gone much higher for a while, so you fix the rate at 1.40 for the order. When 90 days is up, you pay your supplier at 1.40 when the SPOT rate is 1.3860 - you’ve gained an extra 1% of your invoices size (i.e. £1,000 for every £100,000). This is called a Hedge.
What is passive hedging?
Passive hedging is perhaps the most simple form; it only requires making the decision to fix your exchange rates at the desired level for the entire year. They work best with market orders, which trigger when the exchange rate you want is available.
Let’s make it simple.
- You pay your suppliers in Euros and US Dollars.
- Your total invoice amount is 500,000 USD and 500,000 EUR.
- Your budget rate for USD is 1.35 and for Euros is 1.15.
With market rates at those levels, you decide not to risk currency movements and raising prices on your customers.
You book a 500,000 GBPUSD hedge at 1.35 and a 500,000 GBPEUR hedge at 1.15.
You make no loss on currency movements, securing your margins, and no longer have to worry about market movements.
This is passive hedging.
Why choose Integritas to hedge? We allow you to buy forwards online, and access your funds in the same way, meaning you don't have to over communicate with FX brokers. We also fix our spreads at an ultra low price, show the live midmarket rate, and even offer forward rates, which allows you to secure exchange rates that are far more competitive than what traditional FX brokers offer. Find our more about Integritas here.