Two sides of one coin: Hedging vs. Speculation

The moment of realisation 💡

Over the last couple of years, we’ve spoken to hundreds of venture backed tech companies that have a continuous requirement to convert their currencies.

Most commonly because they have raised venture capital/debt or bill revenue in one or a couple of main currencies, and have operational expenses like rent, payroll, etc. in other currencies.

Over 95% of them simply convert on the day that they need to make payments. It’s the default way to do it.

If you deal with your currencies in this way, there’s no other way to say this - you are unwittingly speculating on currency markets. 

Let me explain.

When you know with a reasonable degree of certainty what your future projected foreign cash flows are, you have a problem.

You know what the exchange rate is today, but what will it be tomorrow, next month, next quarter, in 12 months time?

Spoiler alert! No one knows. 

The notion that someone would claim to know is absurd. 

If I told you that I can predict the future, you would laugh at me right? Exactly.

What we do know from history, is that exchange rates can swing 20% or more each year.

Now I hear you thinking… “Well yea, exchange rates could go against us, but they could also go in our favour”.

OK, now STOP! 

You just did it.

By even thinking that rates *could* go in your favour - you have unconsciously fallen into the speculation mindset.

I find this is the easiest way to think about it;

Speculation = Attempting gain.

Hedging = Preventing loss.

If you are not in the mindset of preventing loss, you are in the mindset of attempting to gain - whether you realise it or not.

Is attempting to gain from exchange rate movements your goal as a company? Of course not. 

You’re not in the business of currency trading. You’re in the business of selling tech.

Should you be attempting to prevent loss from exchange rate movements? Absolutely!

You don’t deal with exchange rates because you want to. You deal with them because you have to.

Using a hedging strategy to prevent loss is the smart money move.

Ways you can hedge using Bound 🤔

Forwarding 🔒

Forwarding is for companies that simply want to lock exchange rates for use in the future. 

If you’re someone that wants certainty above anything else, particularly for things like foreign revenue with thin margins, then Forwarding will suit you perfectly.

With the Bound app you can lock exchange rates for your future/projected foreign cash flows and see the numbers right on your screen. 

That’s great for planning and gives you time to make adjustments based on changing business needs.

By locking exchange rates, you are of course removing the ability to gain from where the rate is currently.

But remember, you are not attempting to gain with a hedging strategy. 

You are attempting to prevent loss, and if you want to do that from this particular moment in time, that is exactly what Forwarding does.

“Ok makes sense, but I don’t necessarily care too much about certainty. I’m more concerned about converting or  locking rates at a bad time. Can you help with that?”

Glad you asked!

Next up…

Averaging ⚖️

This is for companies that want to dramatically reduce the risk of mistiming their currency transactions.

If you’re someone that doesn’t want to pay attention to exchange rates at all, then Averaging could be for you.

With Bound you can  automatically split up your future/projected foreign cash flows into many small transactions and spread them over several months (it all happens in the background - the only time you need to move cash is on your chosen settlement date).

By doing that, you  spread the risk of converting or  locking a rate on a bad day.

Think of it in comparison to diversification in investing. You wouldn’t pick just one stock to invest in and invest all your money at the same time. You would diversify your investment by buying an ETF or index fund, and you would buy into them over time. A slice each day or each month for example.

Averaging works in a similar way.

You don't convert or lock a rate on just one day, but on many days over a period of time.

Of course you’ll trend with the market over a long period of time by using this strategy.

But you are attempting to minimise loss by avoiding the worst days to convert or lock a rate on.

You will benefit from the smoothing effect of Averaging, so there will be very little difference between the exchange rates you use month on month, and that’s great for reducing FX noise in your books.

By Averaging, you are essentially slowing down and reducing market volatility. That means in a dramatic shock event where rates move significantly and fast, you won’t suffer the consequences overnight and instead have time to adjust.

“Sounds pretty cool and easy, but I’d like something in the middle. I want to reduce market volatility and also have some degree of certainty.”

No problem.

We have something just for you…

Ranging 🟰

Ranging is for companies that want certainty of exchange rates within a specified range of their choice.

If you’re someone that looks at the current rate and wants to try and achieve a better one, but also wants protection in place, you sound like a Ranging customer.

The Bound app allows you to enter both your target and protected rates for your projected foreign cash flows.

If your target rates are hit, happy days. You will automatically grab it. Trade booked.

If your protection rates are hit, happy days. You will automatically grab it. Trade booked.

If neither are hit by the time you need the currency, you will obviously be inside your specified range and will book at the live market rate.

Now for the savvy ones, if you see that your target rate looks like it’s going to get hit soon, you might consider moving both your target and protection rates in your favour to benefit from  the gains whilst maintaining your protection. 😏

Ready for your new and flexible toolkit 🕹️

Maybe you’re worried about getting your hedging wrong - “what if my projections change?”

Fear not my friends!

You can make amendments to your projected amounts and future dates on all strategies at any time on the Bound app.

And if you’re wondering - we price all our strategies exactly the same.

Why?

Because we don’t care which way you decide to hedge.

We just want you to stop speculating and start preventing loss 😎 - especially if you can do it in an effortless and automated way.

Who doesn’t want to save time and money, right?