Reduce Foreign Exchange Rate Risk Hedging SME Foreign Currency Receivables Companies involved with international trade often want to reduce their exposure to foreign exchange rate variations and potential foreign currency losses by selling their accounts receivables denominated in foreign currency for delivery at a future date, but at today's market rate for future delivery. Until recently, such hedging and risk reduction was available only to big companies with large contracts. Regarding possible hedging, companies need to forecast the time periods in which revenue is expected to be collected. Big company treasury groups often calculate foreign currency exposure at each subsidiary monthly and hedge that balance sheet exposure with a forward exchange contract at the most favorable price quoted by the big banks. This financial service is now available worldwide to SMEs via AsiaMart.
Forward contracts can go out two years.
However, there is a very thin market for forward contracts going out more than one year. A lot of companies hedge weak currencies like the depreciating South African rand, for example. On a given day, the spot rand rate might be 6.40 and the forward would add .4 to that, making the forward rate 6.80 six months out. This forward rate takes into account the substantial difference in interest rates and bank's costs and profits. The banks would actually give companies a worse rate than this so as to cover their costs, profits and risk.