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Basic steps to hedge your local business against naira

The NGX’s most recent earnings results reveal that PZ Cussons and Nigerian Breweries, among other blue-chip brands, FX exposures cost the blue-chip companies a substantial sum of money.

Nigerian Breweries, in particular, reported its lowest earnings in almost ten years, primarily attributed to significant operational costs and foreign exchange losses. The brewery company experienced a surge in foreign exchange losses due to its foreign currency-denominated payables. The net loss on foreign exchange transactions increased to N153.33 billion in 2023, compared to N26.34 billion in 2022 and N7.04 billion in 2021.

To fully capitalize on global prospects, your company must be set up for smooth foreign exchange transactions and maintain an awareness of exchange rates and other associated costs.

Companies must first determine which kind of hedging makes the most sense for their operations from the two available: internal or external. The ideal hedging plan for a given business will rely on its unique situation and the way foreign exchange is used in its operations.

Product exports can guarantee higher sales and overall profit margins. Export-focused companies broaden their horizons and reach new markets in the area, generate the foreign exchange required to fulfill international commitments and reduce their vulnerability to the volatile foreign exchange market in Nigeria.

These companies are more concerned with finding new ways to exhibit their work overseas than they are with making money from selling their products on the local market. Additionally, it lessens your whole dependence on a single home market.

For medium-sized and larger businesses—those that have already grown in the local market—exporting items is quite beneficial. Exporting goods overseas might provide these companies with a significant chance to boost sales potential. Furthermore, exporting can be a means of identifying potential overseas production or franchising prospects.

When a company hedges its foreign exchange risk, it enters into a financial contract that can fix the exchange rate for a specific future date or safeguard the company from unfavorable exchange rate movements.

This implies that, regardless of how the exchange rate fluctuates, the company will always know how much it will pay or receive in its native currency, or at the very least, it will know the worst-case situation.

The company can more precisely predict its financial performance by doing this. To keep their margins from being squeezed, many companies also think about hedging their FX exposure. FX exposure can significantly impact both top and bottom-line financial performance, depending on the type of business. 

Forward contracts are one of the most secure ways to secure your hard-earned capital against currency volatility. These permit you to pre-set the trade rate at which you may purchase or offer but as it were pay for it at a few points within the future once you require it.

For illustration, envision that you just are about to buy a few $5,000 worth of products from a provider within the Joined together States. The installment terms you have concurred to state simply will pay the provider for these supplies once you get them, within six months.

Between the conclusion of the bargain and the genuine payment for the supply, the greenback seems reinforced, and you’ll conclusion up paying more naira than anticipated.

Be that as it may, on the off chance that you purchase a forward contract, you’ll concur to purchase $ 5,000 six months from presently at today’s trade rate. This implies you’re secure from paying additional.

This entails doing so in the currency of the nation in which the customer is situated. This shields the naira-based business from financial losses if the dollar appreciates and it transfers the currency risk to its clients. Delaying or speeding up foreign exchange payments is known as leading and lagging.

If the domestic currency declines, the business might postpone payments until the exchange rate improves. Matching, also known as natural hedging, is the process by which an organization balances its foreign currency payables and receivables. If the value of the company’s home currency appreciates, this helps shield it from losses.

If the domestic currency declines, the business might postpone payments until the exchange rate improves. Matching, also known as natural hedging, is the process by which an organization balances its foreign currency payables and receivables. If the value of the company’s home currency appreciates, this helps shield it from losses.

Conclusion

Even though historical patterns cannot guarantee a currency’s stability in the future, if you must choose between a stable and an unstable currency, carefully consider your options.

A hedging strategy is not a guarantee, Treasury teams should seek advice from an investment bank to determine the best hedging strategy when they are unsure of which approach best meets their needs.

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