By Michele Loureiro
The ups and downs of exchange rates directly impact the bottom line of companies engaged in international operations. Therefore, Currency Hedge tools can be an option to bring predictability and security.
According to Saulo Moreira, Commercial Superintendent at Ouribank, there is no defined sector of activity nor a minimum amount to seek currency hedging. “We help each client decide how much of the amount they want to protect and find the best option for each business. The idea is that the client can focus on the essence of their operation, on selling their products, and we take care of the exchange rate,” he says.
The tool, created to protect companies from exchange rate fluctuations, offers the possibility of fixing future rates and helps to reduce exchange rate risk efficiently, as well as lowering operational costs. There are two most common types of currency hedging: Currency Hedge and NDF.
Difference Between Currency Hedge and NDF
To understand the main differences and help in the choice, the Ouribank Blog gathered information about the two modalities and prepared a generic example, with simulated rates, to understand the differences between the types of Currency Hedge operations. Check it out below:
Company X scheduled on August 10, 2024, an import of pens from a foreign supplier worth US$ 100,000. This import is scheduled to take place on February 10, 2025. On that date, Company X must make the payment to the supplier, who in turn will send the pens.
The scenario at the time of closing the deal is an exchange rate of R$ 5.50, but the volatility until the payment date cannot be calculated, as it depends on external factors. To ensure the operation is safe, Company X seeks Ouribank and has the following options for Currency Hedge:
1.Currency Hedge
The Currency Hedge resembles a standard exchange operation but occurs with its settlement on a date more than two business days later. In the presented case, if the negotiation has already been carried out, Company X presents at the time of contracting the exchange, the documentation that supports the closing of the import exchange (if the negotiation has not yet been closed, the documents can be presented later).
For this operation, the bank offers a rate of R$ 5.70 per dollar, totaling a cost of R$ 570,000, to be paid on February 10, 2025. To guarantee this operation, the bank buys the dollars in the market today and holds these dollars in its account until the payment date, which is why the settlement rate in 6 months is higher than the commercial exchange rate at that moment.
On the maturity date of the operation, it does not matter if the exchange rate is R$ 5.50 or R$ 6.20, company X will pay the bank R$ 5.70 per dollar.
The logic is similar for cases of receiving funds from abroad. Consider that a businessman will receive US$ 100,000 from a client abroad after providing the service. However, if the dollar depreciates by a few cents between the negotiation date and the receipt date, the profit margin can be entirely consumed.
Therefore, with the Exchange Rate Lock, it is possible to freeze the currency rate at a suitable rate for business planning. This way, even if the dollar depreciates, the company will have predictable accounting and will not face losses.
Advantages:
· It is not a financing;ão é um financiamento;
· It allows the client who sends or receives funds from abroad to choose when to lock the exchange rate of their operation;
· It can be done before or after the shipment of goods or the provision of services.
2. Currency Term, also known as NDF
The NDF (Non-Deliverable Forward) has the same pricing as the exchange rate lock operation, but it is a derivative.
The main difference of this operation is that company X does not need to present exchange documents, as it is an operation with a derivative instrument referenced at an exchange rate.
On the maturity date of the operation, depending on the exchange rate and the client’s position (buy or sell), the bank will pay the company the entire difference between the maturity rate and the contracting rate. In the opposite scenario, the company will have to pay the difference to the bank.
Advantages:
· No daily adjustment, only at contract settlement;
· Values, maturity, and future prices are negotiated at purchase;
· Can be partially or fully closed;
· Flexibility regarding terms;
· Locks an exchange rate;
· Pays or receives the adjustment at the determined maturity. With over four decades of experience in foreign exchange, Ouribank has specialists ready to understand the needs of each company, assisting in choosing the most advantageous and secure option. Click here to learn more about our Currency Hedge solutions and speak with our specialists!