Hedging Forex

Tips for hedging forex risk in South Africa.

The South African Rand (ZAR) is one of the world’s most volatile currencies. South Africa is considered an emerging market and demonstrates many of the attributes typical of one – high interest and inflation rates, high (but decreasing) degree of reliance on agriculture and raw material sectors, strong potential for growth, capital controls and relatively low per-capita incomes.

South Africa also has well-regulated and liquid markets, strong financial institutions and a strong and independent judicial system.

Being English-speaking adds additional appeal to the ease of doing business in South Africa to the global English-speaking community.

Currency challenges faced by businesses in South Africa

The result being that ZAR is heavily traded and highly volatile. As an Emerging Market currency, ZAR shows many of the typical attributes:

Wide BID / ASK spreads – the difference between where you can buy and sell ZAR at any given point in time is large, resulting in it being very expensive to exchange from ZAR to a foreign currency and vice versa
High Commissions and Fees – international money transfers are expensive due to a limited number of banks and liquidity providers participating in the market (high regulation effect). Limited competition results in higher prices in any market
Regulatory and Compliance requirements – high levels of regulation result in extended processing times, significant documentary requirements and frequent delays
Lack of Transparency – disclosures are frequently insufficient for clients to ascertain how much is actually being charged by their financial services providers in commissions and fees

Available tools to manage currency risk – How to hedge currency risk

All the above add complexity and frustration to doing business in South Africa, this is particularly acute for the SMME (Small, Medium and Micro Enterprise) business community. These are the tools that can be employed when hedging forex risk:

Understand actual currency risk – too frequently businesses do not fully understand their actual currency exposure. Netting expected inflows and outflows of a particular currency and then hedging the net exposure is far more efficient that hedging each transaction. Getting these systems and processes right and operationalized has the greatest impact on any businesses currency risk management and hedging cost
Foreign Currency – receive, hold and manage the required foreign currency in a foreign currency account to meet future obligations. Simple solution but can be inefficient from a cash-flow perspective. Only effective for future international payment obligations
FX Forward – a Forward Exchange Contract (FEC) is a foreign exchange transaction where the value date of the transaction is greater than 2 business days into the future. The rate is agreed today for a date in the future, ensuring the client has certainty in relation to the future exposure in domestic currency.
Currency Options – an option gives the buyer of the option the right, but not the obligation, to buy or sell one currency against another at an agreed price until an agreed date in the future. Option strategies are wide in variety from very simple single option strategies to highly complex strategies involving multiple options.
Currency Swaps – is an agreement between 2 parties where they exchange the principle amount of a loan plus the interest in one currency for the principle plus interest in another currency. Typically used by larger companies to hedge foreign currency denominated loans.

How can Domisa Treasury assist

Domisa Treasury is able to assist SMME businesses in South Africa in hedging forex and managing their currency risk by facilitating the implementation the correct combination of the above tools to achieve the optimal solution for their unique business needs. We leverage our strong market relationships to make these solutions a reality for our clients.

Hedging Forex Services

What we offer:

Bank accounts – we facilitate the setup of foreign exchange transactional accounts with preferred providers
- Rand (ZAR) accounts – High interest, no monthly fees, fully transactional internet banking
- Foreign Currency Accounts – accounts available in all major currencies. No monthly fees, internet banking
  - International Payment Solutions – send, receive and hold foreign currency
  - International money transfer – pay foreign currency invoices directly from your currency account
  - Non-ZAR currency pairs – buy GBP with your USD for example

Commission, Fees and Transparency – Domisa Treasury supports greater regulation of foreign exchange market participants, authorized dealers and intermediaries alike. Transparency to clients is paramount and we provide full disclosure of deal economics to every client on every transaction
- Commissions – Domisa operates on published, highly competitive commission tiers:
  - applicable to all our clients consistently
  - Our systems and processes do not allow deviation from these
  - We do not engage in ‘bait and switch’ pricing where transactions become more expensive for clients after the first few transactions – a pervasive problem in the industry
  - Clients always get our published tiers
  - Our live, online calculator is a highly accurate indication of where our clients are currently dealing
    - available to everybody and requires no information to be provided in order to get an indication – its an opportunity to show off our fantastic pricing, not a data trawling exercise!
    - Use it to compare us to your current provider in real time
- Fees – There are no fees on transactions of R50,000.00 or greater and a flat fee of R250.00 below R50,000.00

Products – Domisa is able to facilitate the full range of foreign exchange products
- Same-day, Next-day and ‘Spot’ Foreign Exchange
- Forwards – Forward Exchange Contracts (FEC)
- Derivatives – Options and Futures

Please contact us for a free consultation to discuss your business needs and what Domisa Treasury could do to assist you in hedging forex and managing your foreign currency risk in the most efficient and cost-effective manner.

Hedging Forex | Foreign Exchange Hedging | Hedging Currency Risk | Exchange Rate Risk

Frequently Asked Questions

As an established Treasury in South Africa, we’ve helped countless businesses with their forex hedging needs. Through this process, there are a few key questions that are repeatedly asked. In this article, we’ll answer them in a simple, straightforward way.

What is hedging in forex?

Hedging with forex is a strategy used to protect one’s position in a currency pair from an adverse move. We use a combination of tools (mentioned above) to protect our clients against currency risk.

Is hedging a good strategy?

Yes. When properly done, hedging strategies reduce uncertainty and limit losses without significantly reducing the potential rate of return.

Hedging Forex Rate Risk in South Africa