Derivative transactions (FX risk Hedging)
Term trades include the most widely known hedging instruments – Forward contracts and swaps. The primary function of a forward is to ensure against unfavorable trends of the exchange rate of two currencies.
Benefits of using FORWARDS with AKCENTA
- No fees
- Easy accessibility
- No upper limit on transaction amount
- Time savings – no need to monitor exchange rate trends on the market
- Money savings – you won't lose the margin on a realized trade in the event of negative exchange rate trends
- Better cash flow planning – you won't lose money due to foreign exchange risk, giving you an opportunity for better financial planning
- Security when negotiating a trade – you know the exchange rate ahead of time today
- Insuring the exchange rate for the entire term of the contract
- You always have the opportunity to shorten or extend your forward (in full or in part) depending on your current situation and needs
How long can I hedge?
With AKCENTA you can hedge for up to 1 year in advance as standard. Longer terms may be negotiated on a case-by-case basis.
What is a FORWARD?
The primary function of a forward is to ensure against unfavorable trends of the exchange rate of two currencies. A forward gives you the option to buy or sell a specific quantity or currency at an exchange rate set at the time of closing the deal, but with a settlement date in the future (up to 1 year standard, may be longer in individual cases).
What is a FORWARD good for?
With a forward you have the option to gain security and fix your business margin against losses from potential unfavorable exchange rate trends on the forex market.
Now we are able to set an exchange rate which you can use to exchange foreign currency in the future, up to a year in advance. You can thereby fix the exchange rate when calculating the value of a given trade.
Companies and entrepreneurs trading with international partners, receiving foreign payments for exported goods or making paying with foreign currency for imported goods are usually exposed to risk of loss in association with the exchange rate fluctuations of foreign currencies. A change in the exchange rate could result in a significant or even complete loss of operating profit for the company (the exchange rate loss may exceed the margin of the trade). This may result in the significant weakening of the competitiveness of the company itself or even put its future operation at risk.
A simple solution that eliminates foreign exchange risk are exchange rate insurance instruments.
Client – an exporter made a contract in Euros for the sale of machine equipment with a delivery date in 6 months. The Client entres the cost in CZK, using the current exchange rate for calculating the future exchange rate. The Client is now, from the moment of setting the price of the product, until the delivery date exposed to risk of CZK strengthening against the Euro. If CZK is stronger in 6 months, i.e. the exchange rate will have a lower value, the Client will receive a smaller amount of crowns for the amount in Euros than expected (originally calculated).
With an insured future exchange rate, a company gains an effective instrument for financial planning (a calculation rate) and can minimize potential risks. For this purpose instruments for insuring the exchange rate are used: forward contracts.
Trends of selected currencies against the Czech crown in 5 years:
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