Last updated on April 11, 2023
Any business that has dealing in overseas market is open to such Currency hedging in Dubai; or more commonly known as Forex exposure. There may be other kinds of exposure together with commodity risk, Interest rate risk, wage inflation etc. Un-hedged exposure of FX can affect the balance sheet or profitability, which can create cash flow and operational problems. Hedging decreases a firm’s exposure to unwanted risk. This helps in sustaining profits, reducing volatility and ensuring flatter operations. Currency hedging in Dubai is a very effective way to protect against currency volatility; and restrict or minimize loss of any disadvantageous movement in currency. Given recent foreign exchange volatility; this article looks into currency hedging in Dubai mechanisms; and how they can support importer and exporter when trading.
How can currency hedging in Dubai help importer as well as exporter
One of the major risk factors involved in operating an Import or Export business is that; while your Purchase or Sales is in progress; the value of currency may change relative to the value of the U.S. dollar; (assuming Import or Export is with USA from Europe). This means that your business is open to risk in terms of adverse movement in EUR against US$.
What does mean Currency hedging in Dubai?
In very simple terms, Currency hedging in Dubai is an act of entering into a financial contract; in for protecting against anticipated or unexpected changes in currency exchange rates. Currency hedging in Dubai is used by businesses to quell risks they encounter when conducting business internationally.
The idea of Currency hedging in Dubai is the use of various financial instruments; like Forward Contract and other Derivative contracts, to manage financial risk. It involves the description of one or more financial instruments; (usually a Bank or an Exchange) as a buffer for potential loss.
Let us look How Currency hedging in Dubai helps business
Assume a firm receives an export order today with the delivery date being in 3 months time. The contract is worth, say, US$100,000. At the time the contract is placed, the EUR is said EUR 0.90 per US$. Hence the value of the order, when placed, is EUR 90,000. But suppose that the exchange rate changes significantly among the date; when the order is received and the date the order is paid for; (which we will assume is one month after the delivery date). The exchange rate of the EUR & US$ is at 0.87 on payment date. Which means that the firm receives only EUR 87,000 rather than EUR 90,000. This will result in loss of EUR 3,000 for the exporter. To make sure against this happening, the firm can, at the time it receives the order, hedge the currency risk.
There are many ways to hedge currency
If you are an importer and need to buy merchandise abroad; one currency protection method is to simply open an account in the country you are importing from. When the exchange rate is positive; send U.S. dollars to your foreign account for deposit. The bank changes them into the local currency. Now the currency is locked into the other country’s currency and ready to spend.
Most of the Banks offer currency forward contracts; which are essentially an agreement to exchange certain amounts of dollars; for foreign currency on a future date. This lets business to lock in an import purchase or export sale at the current exchange rate; guaranteeing your transaction at the agreed upon price. Of course, if you are Importer and if the EUR appreciates against US$ afterwards, you can’t profit from it; you are latch into an exchange rate. But you have protected your business from the risk of a enfeeble of EUR against US$.
Similar to forward contracts, futures are a commitment to buy currency; in the future at an agreed upon rate based on current exchange rates. You should purchase currency futures contracts from an exchange such as ECE. Futures contracts have very important advantage over forward contracts. There is a secondary market for them; so you could opt to sell your contract before the term is up; so if you change your mind or your business needs the money. On the other hand, futures contracts usually lets a range of final exchange prices rather than a fixed point; so you may not get the exact exchange rate which you want; when the contract hits its maturity date. Also, the contracts are only offer in fix amounts; which may make it difficult to hedge the exact amount you want through futures.
Nevertheless, as a business house, one needs to understand the Cost of Hedging. An important drawback to note about contracts and options is that; each of these currency hedging strategies comes with payments and commissions charged by the bank; exchange, or other party administering the hedging vehicle. Weigh those costs to your business in values whether Currency hedging in Dubai makes economic sense or not.