Forex Strategies: Best Practices for forward contract hedging in Volatile Currency Markets

In today’s volatile financial markets, forex strategies such as forward contract hedging are essential tools for minimizing currency risk. By implementing these strategies effectively, businesses can lock in exchange rates and protect themselves against adverse currency movements. This guide explores best forex strategies and practices, including forward contracts, provides a forward hedging example, and highlights how strategic forex planning can safeguard your financial outcomes.

Booking a currency forward contract hedges your adverse currency movement risk, but by adopting the following strategies you may earn good profits out of it.

1. Always Book Partial Exposure

Booking a partial exposure is always a good idea. For example, if you are expecting an inward payment of USD 100000 then you may book 50% of your exposure i.e. USD 50000, and keep USD 50000 open.

This strategy will balance your currency exchange rate. If the current spot rate on the date of payment is above your booking rate then you have another USD 50000 to get that rate and vice versa.

2. Make Significant Bookings When the Domestic Currency Has Depreciated

If the domestic currency (INR) has depreciated a lot (more than 2% to 5%) recently, you should book your upcoming & future exposure.

For example, if the USD/INR pair has recently moved to 75 from 72 Rs. In this case, the domestic currency, INR, has depreciated by almost 4% and is supposed to appreciate in the future or will depreciate by a marginal amount.

So, booking most of your exposure for up to six months in that scenario is advisable.

3. Hedge a Little Less Than Your Expected Payment

If you are expecting a payment of USD 100000, then most likely you will receive a little less because of correspondent bank charges.

You may receive an amount of USD 99950 in your bank’s Nostro account. So if you are planning to book the entire exposure, then always book USD 500 less than your expected payment to avoid cancellation of the extra amount and charges thereon.

4. Check the Exact Premium Before Booking a Currency Forward Contract

You should check the exact premium before booking a contract so that you get exactly what is available in the market. You may refer to currency websites like ibrlive.com, which displays the live forward rates.

5. Always Opt for a One-Month Window

For example, if you are booking a USD to INR forward contract for USD 100000 for a maturity on 20.09.2021, then you should ask your bank to provide a complete month window. You will get a window of one month starting from 20.09.2021 to 19.10.2021.

Please note that this window is provided because sometimes foreign payments can be delayed due to any reason. You will get a premium only till the start date, i.e., 20.09.2021, but all your inward payments up to USD 100000 from 20.09.2021 till 19.10.2021 can be converted at the booking rate.

6. Never Book More Than Your Currency Exposure

For example, if you are expecting a payment of USD 100000 and you are finding the rate very attractive, never book more than your expected payment. Because no one can predict currency movements. In case of adverse movement, you may lose money for cancellation of the extra booking.

7. Book Continuously

Booking continuously is another good practice to follow. Booking currency forward contracts regularly helps to balance your currency rate over time and is a sound forex strategy to reduce exposure volatility.

8. Book Immediately After Receiving the Purchase Order

One should immediately book a partial amount of the contract after receiving the purchase order. This helps you prevent losses on account of adverse movement.

9. Consider Shorter Duration Booking If Domestic Currency Is Expected to Appreciate

If you are expecting a depreciation in domestic currency in a short span, then you should book contracts for a shorter duration like for 15 days to 1 month. This tactical approach is part of responsive forex strategy execution.

10. Consider Longer Duration Booking When Domestic Currency Is Expected to Depreciate

If you are expecting an appreciation in domestic currency, then you should book contracts for a longer duration like for 2 months to 6 months.

Conclusion

By following the above strategies, you may hedge currency exposure along with saving extra money. These techniques fall under broader forex strategies used by exporters to enhance financial stability. Please note that you should not completely rely on the above strategies as it is the author’s view. You may follow your own strategies as well to form the right decision.

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