currency hedging

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Currency Hedging

With a variety of forex solutions available from our strategic partners, our dedicated forex desk will help you hedge your forex risks and advise you on currency movements to help you anticipate your business costs.

Case Study 1

Suppose Company A gets 80% of its revenue in USD. However, they are local and pay liabilities (rent, salary, local loans etc.) in SGD.

If the USD weakens against the SGD, the company will thus end up having less SGD to cover their local liabilities. For ease of example, assume that their local liabilities come up to SGD $8 million, their SGD revenue is SGD $2 million, their USD revenue is USD $8 million and the USD to SGD exchange rate is 1.25.

This would mean that they are currently making (SGD $2 million + SGD $(8x1.25)million) = SGD $12 million, earning them a net profit of SGD $4 million after liabilities. But if the exchange rate weakens to 1.15, they would instead be making (SGD $2 million + SGD $(8x1.15)million) = SGD $11.2 million, reducing their profit by $800k due to forex movements against their favour.

To protect against this, the company could buy currency forwards that lock in the SGD/USD conversion at a certain rate. For instance, if they lock it in at 1.25 exchange rate, assuming a similar weakening of the USD and a cost of $100k for the currency forwards, they would reduce their overall loss from $800k to just that $100k.

Case Study 2

Suppose Company B would like to expand overseas and do business in Kuala Lumpur. They need to buy buildings, infrastructure, and set up a team there in 6 – 9 months, which they estimate to cost around RM 5 million. The current exchange rate is 2.5, which means that the company needs SGD $2 miilion to fund the business.

However, forward currency contracts and the forward curve implies that the exchange rate in 6 months could worsen against them and become 2.3. This means that in 6 months' time, the company would need to fork out SGD $2.17 miilion, which is more than they budgeted for.

Since they need the cash, they cannot exchange at today’s rate and keep ringgit in the bank. But they can buy a ringgit forward contract, which would lock in the exchange rate at higher than 2.3 Рsay, something like 2.46, including costs. As such, the company would be able to fund the expansion business with only a slightly higher cost РSGD $2.03 miilion Рcompared to what they would have otherwise needed to pay if they exchanged at spot rate in 6 months' time.

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