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EUR/USD. Currency hedging with minimal effort
July 20, 2023
A recent report of Société Générale highlighted that since 2003, EUR/USD volatility has increased in August in 75% of the years.
For a European company that exports goods and receives a payment in US dollars this increase in volatility could create foreign exchange losses. If the company is aware of the currency risks and why they are not worth taking, it can decide to hedge them.
It is important for the manager understands the average rate at which the exports have taken place, so called “weighted average exchange rate” (WAER). Then the exporter can define a channel that represent the level of risk tolerance to the eur/usd swing movement, when the spot price moving outside a defined support or resistance level, the automatic execution of hedge (forward, cfd, option, swap) will trigger with buy or sell limit orders.
By choosing this methodology, the company can minimize currency risk in an easy and efficient manner and reducing the cost of hedging.
Author: Edoardo Liuni