Positive hedging as a necessary strategy for international business

Date: 20 Apr 2015 Comments: 0

money transferThe violent movements in the currency markets of late, including the infamous Swiss franc separation from the Euro during regular business hours, have caused many trading and investment companies to suffer major hits to their balance sheets. Many have looked to update their hedging policies, but this can be difficult to apply when the investment is in developing countries with little forward market availability.

The general view is that markets are going to continue to be increasingly volatile. This trend will be exacerbated by the greater spread of currencies that are becoming important, as Asia and Africa increase their market share. While some companies are looking at pulling back more into their domestic markets because of these risks, but that is hardly going to inspire shareholder confidence in the management.

The volatility of currency movements is expected to increase, even from the recent high levels, particularly if the AIIB begins to function as a central clearing structure at some stage of its development. While the US Dollar is unchallenged at this stage, given the internal difficulties of the Euro and the long decline of the Pound, but this situation may well change as more countries look outside the strictures and risks associated with US control of the worldwide payments system.

The slowdown in the world economy, beginning with the 2008 economic crisis generated from the US property market and continued by the lower growth in China, has hurt many countries with commodity-based industries. This problem has been greatly increased in the last few months by the dip in oil prices, creating massive difficulties for more countries.

While the overall world economy is showing signs of stabilization, it is still far from settled on a country-by-country basis. This brings additional factors for trading companies and investment groups, having to optimize income opportunity but worried about local risks in different parts of the world. In particular, investment companies, hedge funds and banking groups are all struggling with low interest rate returns, including negative rates in some countries.

Positive hedging (PH) is a specialist consultancy, assisting investment groups and trading companies with managing the foreign exchange risks involved in their regular trading, capital risk and income generation exposure. The extremely experienced staff are able to work with clients’ management on risk assessment of current and future business, advising on basic hedging strategy on an ongoing basis.

This advice can also include specific country-by-country advice, where the client has existing business – or is considering starting such trading. This is particularly relevant for clients who are following the trend towards Asia, where the underlying risks can be changing quickly. Close attention has to be paid to the ability of such markets to handle large volume in FX when any change in market conditions occurs.

The particular added factor for PH’s clients is the anticipatory trading advice, helping hedge an overall trend as well as specific account needs. This facility incorporates an option for PH’s staff to actively or passively manage such trading; in either event, the client has full control – and ongoing confidential advice – over all transactions.

Trading in FX can be conducted through clients’ current banking contacts, or via specialist FX trading counterparties – and can be based on margin trading or physical settlements. And, at all times, any client funds remain solely under the control of the client.

One additional service provided by PH is assistance on payment processing and the connected legal, fraud control, security and reporting requirements, if required. The regulatory matters can be very confusing, when factors such as data control, language translation and tax reporting are included.

In conclusion, there are many factors to be considered in how to assess business links into other countries. The current trend is towards Asia from Europe as an underlying factor; how companies decide to work within this will vary by their individual preference. But what it does mean is that FX volatility will continue to be a big factor in the potential income they can achieve. PH is there to assist in its specialist area to make it work.


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