Today, the functioning of the foreign exchange market is no longer a secret for corporate treasurers. However, some do not yet master all the subtleties of this universe. Therefore, they decide not to take action. Thus, they are depriving themselves of the many business opportunities offered by futures contracts. For those in the know, fear of losing your investments is a common problem. Fortunately, there are a few tips to limit the risks and take full advantage of future trading. This is what we share with you in this article.
Take stock of the situation of your company
If companies are increasingly using futures contracts, it is because they allow them to protect themselves against currency risk. Still, hesitating? You only have to do some investigation to find out if your business can also reap the benefits of future trading. In general, the proportion of turnover achieved internationally gives the first indication. The more you do business with foreign currencies, the more you will be exposed to currency risk.
When you trade futures on the right platform, you greatly limit the currency risk. It should be noted, however, that your company’s margin level can influence the management of this risk. For example, if you market products with a low margin, you may be forced to sell them at a loss when the exchange rate drops. Conversely, you might resist market fluctuations if you have larger margins.
Identify the right time to buy futures
Depending on market exchange rates and your business situation, the strategy to use to protect against currency risk may vary. Depending on the case, you can intervene in the futures market or the spot market. It should be noted that simultaneous intervention in both markets is possible in certain cases.
For example, if your company needs to make an international payment in 3 months. It is very likely that a market fluctuation will occur at the time of the transaction. In order to avoid this problem, you need to insure yourself against currency risk now. To achieve this, buying futures contracts is an effective solution. In addition to freeing up your cash flow, this choice allows you to secure the transaction you will be doing in 3 months now.
By their operation, forward contracts allow a company to adjust its currency risk hedging strategy taking into account its operational schedule. Depending on the terms of the contract, you can extend the deadline or request that it be lifted in the event of unforeseen circumstances or poor planning. By buying a futures contract for your next international transactions, you lock in the exchange rate at which your foreign currencies will be converted. Thus, you improve the management of exchange rate risks. It is said, moreover, that the forward contract functions as insurance to protect users against an unfavorable evolution of the exchange rate.