Rolling FX Hedges for Global Risks

Manage foreign exchange exposure in a volatile market

One of the many difficult questions facing companies today is deciding how and when to hedge foreign exchange exposure. Todays Global Foreign Exchange markets remain volatile and minute-to-minute changes in the value of the US dollar make this decision even more challenging.

Rolling FX hedges can be the solution. Im Garry Duncan, Managing Director in PNCs Foreign Exchange Group.

Rolling FX hedges are similar to dollar cost averaging which is so common in todays investment world. This product can be carefully tailored to match the companys cash flow needs and appetite for risk, while also allowing the flexibility to adapt to changes in the business environment.

For example, an importer using rolling FX hedges might purchase EUR at an exchange rate of 1.51 on January 1, followed by a purchase of EUR at a rate of 1.42 on February 1. Over a 1-year hedging period, planned EUR purchases at defined intervals will produce an average, or blended, exchange rate while smoothing out day to day volatility.

Rolling hedges will also ensure that the company is 100% hedged in the nearest month, removing any uncertainty about immediate cash flow needs.

So, how do rolling FX hedges create this blended rate and smooth volatility?

First, a foreign exchange professional works with the company to identify and define the FX risk in the underlying business. Then, the company can begin to layer into their rolling FX hedges which look like this:

• 1st month the client buys 100% of defined exposure

• 2nd month buy 75%
• 3rd month buy 50%
• 4th month buy 25%

Once these initial FX forwards have been established, the company can then add to the exposures in 25% increments at defined intervals—essentially building on and extending an FX maturity ladder that will match their exposures. This is the key to achieving a blended rate over time.

Unlike the conventional one and done approach that locks in an FX rate for a quarter or an entire year, rolling FX hedges allow a company to benefit from multiple observations taken over the life of the hedging period.

Using this flexible, programmatic approach, the company can adjust hedges at more frequent intervals and manage changes in its business situation more effectively.

Virtually any organization with identified foreign exchange exposure can benefit from using rolling FX hedges.

These include:

• Importers
• Exporters
• Organizations that receive foreign-denominated dividends or royalties and
• Businesses that fund international operations or investments through scheduled capital payments

Rolling FX hedges provide 100% hedging in the near term and better management of foreign exchange exposure over the long term

If you would like to explore the concept of rolling FX hedges, please get in touch with me or any of my colleagues on the PNC FX team. My contact information appears on the previous page.