Case Study Overview

The business is a chain of stores in the UK and is expanding internationally and has an ongoing requirement to purchase Euros. This covers the cost of products they import and is also funding their expansion into the continent.

It has experienced rapid growth, starting small, and as such traditionally only traded in the spot market without a hedging policy. As the company has continued to grow, they faced difficulty managing FX volatility on a week by week basis.

Assessment

Simplicity and certainty are key for this business.

Worked with the company to put a hedging policy in place, while offering continuing advice on how this is to be executed.

Put hedges in place as the new year financial year approaches and set budget and pricing based on the levels they achieve. They are in a competitive industry so the achieving good rates of protection are important.

Hedging policy is to use a combination of spot, forward and option structures, ensuring they are 50% hedged by the beginning of the new FY with the flexibility to protect up to 75%.

The primary objective is to have protection in place, however wish to retain flexibility to participate in favourable FX movements over the course of the year.

Proposal

It was determined that the company’s objectives would be best met using a mix of three products aimed with providing downside protection, combined with a good level of upside participation.

After assessing event risk and market positioning as the new financial year approached, we deemed that on balance there was a good opportunity for GBP to rally against the USD so wanted to factor this into the decision making process.

Outcome

Based upon this we decided to use market orders to execute their round of hedging.

This company traded a forward contract combined with 2 option structures.

The forward order was close to the market and filled almost right away, this was combined with a  forward extra providing flexibility within in a range and a participator providing unlimited upside, seen as important should we have reached a deal in Brexit negotiations.

Services provided

LIMIT ORDER

PARTICIPATING FORWARDS

FX FORWARDS

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