There are several compelling arguments for not undertaking currency hedging, depending on your specific circumstances and goals. Currency hedging involves using financial instruments to mitigate the risks associated with fluctuations in exchange rates. However, there are situations where choosing not to hedge currency exposure can be a strategic decision. Here are some reasons to consider:
Currency hedging often involves transaction costs, fees, and potentially complicated financial instruments. For smaller businesses with limited resources, these costs could outweigh the benefits of hedging. Instead of allocating resources to hedging, focusing on the core business operations might provide a higher return on investment.
Hedging currency risks may lock a business into specific exchange rates, preventing it from benefiting if exchange rates move in its favour over the long term. By not hedging, the business can take advantage of favourable currency movements that could contribute to increased profitability.
Hedging can introduce a level of rigidity in a business’s operations. Not hedging allows the business to remain flexible and responsive to changing market conditions and opportunities, which can be especially important in dynamic and competitive industries.
In some cases, a business may already have natural offsets in its operations. For instance, if a company earns revenue in multiple currencies and also incurs expenses in those same currencies, the impact of currency fluctuations might be naturally balanced, reducing the need for additional hedging.
Currency markets can be complex and unpredictable. Managing currency hedges effectively requires specialized knowledge and expertise. By not engaging in currency hedging, the business can avoid diverting its focus and resources away from its core competencies.
Currency fluctuations can work in favor of a business. If a company is exporting goods or services to foreign markets and the domestic currency weakens, its products could become more competitively priced, potentially leading to increased sales and revenue.
Embracing currency risk can offer a level of diversification in a business’s overall risk profile. If a business operates in multiple markets, currency fluctuations might not significantly impact its overall financial health, especially if it has a well-diversified customer base.
For businesses that have international operations, not hedging currency risks can align the interests of shareholders and management. When management’s performance and compensation are tied to the company’s financial performance, they have a vested interest in maximizing overall profitability, which includes managing currency risks effectively without excessive hedging.
Large multinational corporations often have a broader revenue base, which can help offset the impact of currency fluctuations. In these cases, currency risks might be less significant in the context of the company’s overall financials, making comprehensive hedging less necessary.
It’s important to note that the decision not to hedge currency risks should be based on a thorough understanding of the business’s operations, risk tolerance, financial goals, and market conditions. Each business is unique, and seeking advice from financial professionals or consultants can help in making an informed decision that aligns with the company’s specific circumstances and objectives.
Adrienne Sartori
