Foreign exchange hedging: how to protect your assets from dollar fluctuations?

Roberto Campos Neto, president of the Central Bank of Brazil, often says in interviews that exchange rate fluctuations absorb economic shocks and are part of the financial market. In practice, currency rises and falls are expected, but the truth is that this fluctuation can hinder business predictability and requires attention from foreign trade companies.

To give you an idea, on the first business day of 2024, the dollar closed the trading session at R$ 4.89. Three months later, at the beginning of April, the coin was worth R$ 5.05. In October, the prices were around R$5.45. The fact is that those cents can make a huge difference for those who need to carry out transactions with the American currency.

Just as there is a devaluation of the currency, the dollar can rise at any time and reach higher levels. The fact is that the fluctuation is constant and it is impossible to predict the behavior of the variables that make up this index, such as political and economic factors, and supply and demand.

The good news is that there are mechanisms available to control this price and protect assets and investments that require foreign currencies. This 'super power' is called an exchange hedging.

Offered by financial agents, such as Ouribank, foreign exchange hedging is a mechanism created to protect individuals and companies from exchange rate fluctuations. Through this tool, it is possible to fix future prices and reduce foreign exchange risk in an efficient and secure way, in addition to reducing operating costs.

In practice, it is possible to know exactly the total amount of disbursement or earnings from a transaction involving international currency in a few months or years, regardless of what happens with the dollar in that period.

This tool provides an important element for those who trade in international currencies: predictability. By hiring the foreign exchange hedging, the entrepreneur can dedicate himself to the business without worrying about external variables, and the individual can organize himself to bear the fixed amount.

The hedge is suitable for those who are exposed to risks and wish to minimize the possibilities of losses resulting from them. And in this case, risks of various kinds apply: this may be the case of those who have an importing company, a stock portfolio, of those who own or produce physical assets subject to price changes, or even for those who have some level of exposure to foreign currencies. Any person or company can hire the tool.

How to use the foreign exchange hedging?

Foreign exchange hedging can be used in situations such as product exports and imports. An example may be an importer that sells cell phone components and needs to order the products from China. Let's suppose that each piece costs US$ 5 and the purchase of 10 thousand units adds up to a total amount of US$ 50 thousand dollars, to be paid upon delivery, scheduled for three months.

Imagine that on the closing date of the contract, the currency is quoted at R$ 5.20, but on delivery the amount is R$ 5.35. The total cost would then go from R$ 260 thousand to R$ 267 thousand, a difference of R$7.5 thousand, which compromises the profit margin of the operation.

The opposite situation may also occur. Imagine an exporter who will receive US$ 100,000 for their agribusiness products under a contract signed for six months. At the time of closing, the dollar was at US$ 5.50, but increased to R$ 5.25 at the end of the period. The loss could amount to R$ 25 thousand.

The examples for individuals follow the same logic, whether for the purchase of real estate, works of art, or even to keep an entity out of the country. The fluctuation can compromise planning and even make the project unfeasible.

Precisely so that there are no complications in this regard, the exchange hedging can be contracted, regardless of the value being protected, and ensure that the planning is carried out. It is important to note that there is no maximum due date. Just as the amount of the transaction can be customized according to the client's needs, the period can also be negotiated.

In addition, during the period determined by the contract, the customer can make revisions and carry out new locks. This provides flexibility and guarantees so that financial planning is more reliable and with less risk of currency volatility.

The logic of the tool can be replicated for any currency. Ouribank has one of the broadest portfolios in the market and is able to carry out transactions in different currencies. Transactions are generally converted to dollars or euros, but the customer can choose to set the rate on the desired paper.

Types of foreign exchange hedging

There are three types of foreign exchange hedging transactions:

● Gear lock, known as a future gearbox. This product is similar to the standard exchange transaction, but it is liquidated on a date greater than two business days and less than one year. The company must submit, by the time the exchange is liquidated, the documentation that supports the closing of the lock;

● Coin term, also known as NDF. This product has the same price as the exchange lock operation, but it is a derivative. The main differential of this operation is that the company does not need to present exchange documents, since it is a derivative transaction referenced at an exchange rate. In addition, the term of currencies can also be contracted for settlement in periods longer than one year;

● Exchange option. In this regard, through the purchase of a call (call option) of dollars, Ouribank sells to the company a right to buy dollars on the due date for a fixed amount, charging a single fee. If the dollar is higher than the expected level, the bank will pay the company the entire difference, but if the dollar is below the amount established as a ceiling, the company can simply relinquish its right to receive reimbursement (since there will be no amount to be reimbursed) and then it will buy the dollars at the market rate.

How to hedging an exchange rate?

The ideal is to seek partners to help the client identify the most suitable exchange lock for their business, based on variables such as sales volume, deadlines, fixed transaction costs and desired profitability.

Ouribank, for example, has more than 40 years of experience and helps to find the ideal tool according to the needs of each client. To this end, it has a dedicated team and the best business opportunities in the market.

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