Spot or Forward? You’re Probably Asking the Wrong Question

We get asked this a lot.

“Should we be buying spot or should we book a forward?”

And the answer is normally:

It depends.

Not particularly exciting, but it’s true.

If somebody tells you every business should be hedging everything, I’d be cautious.

Equally, if you’re buying millions in foreign currency every year and doing absolutely everything on spot because “that’s what we’ve always done”, I’d question that as well.

Let’s make this really simple

You’ve got a €100,000 supplier payment tomorrow.

You buy the euros at today’s rate.

That’s spot.

You’ve got a €100,000 supplier payment in three months and you agree the exchange rate today.

That’s a forward.

The big advantage of the forward isn’t necessarily getting a better rate.

It’s knowing what that €100,000 is going to cost you.

That’s the important bit.

“But what if the rate gets better?”

Probably the most common question we hear.

And it’s completely understandable.

You book a forward at one rate and then watch the market improve.

It’s frustrating.

But you’ve got to remember why you hedged in the first place.

If you took out home insurance and your house didn’t burn down, you wouldn’t complain that you’d wasted the premium.

You protected yourself against something you didn’t want to happen.

FX hedging is similar.

If your business can comfortably absorb currency movements, fine.

Stay more exposed.

But if a 5% move wipes a big chunk off your margin, that’s a completely different conversation.

It doesn’t have to be all or nothing.

This is probably the biggest point.

You don’t necessarily have to choose between:

100% spot

or

100% hedged.

Let’s say you’ve got €1m of fairly predictable purchases over the next six months.

Maybe you protect part of it.

Maybe you leave some open.

Maybe you protect more of the requirements you’re highly confident about and less further into the future.

There are plenty of ways to approach it.

But the strategy should come before the product.

That’s why when somebody asks us:

“Should I book a forward?”

We’d rather first ask:

“Show us what you’ve actually got coming up.”

Then we can have a proper conversation.