Did you know that currency movements can turn profits into a loss?

Few Danish companies safeguard their business against currency movements, according to a survey by the Confederation of Danish Industry. Should they?

 

Many factors can cause fluctuations in the global currency market in the period between a signed deal and the final payment. Such fluctuations create cash flow uncertainties for businesses and headaches for their CFOs, with the risk of increased purchase prices and decreased selling prices.

That is why you should always have a hedging strategy in place to help mitigate the risk of currency fluctuations and the potential negative impact on your forecast profits.

How many Danish companies use hedging?

The Confederation of Danish Industry recommends that Danish companies evaluate how hedging can assist in managing currency risk. Despite these recommendations, a survey from the Confederation (Danish language only) shows that only 10-33% of Danish companies hedge their activities in USD, GDP, NOK and SEK (depending on currency). These currencies represent the biggest trading partners for Danish companies, along with EUR. The survey is based on 345 companies in Denmark.

Despite the low use of hedging, annual currency fluctuations can be up to 10%. The graph below shows the volatility of the individual currencies.

Fluctuations: Danish companies’ currency flows, hedged and unhedged, as well as the volatility for the four currencies, USD, GBP, NOK and SEK. Source: The Confederation of Danish Industry

How much can currency fluctuations affect financial results?

Example: Exchange rate exposure for a hypothetical Danish company

The currency composition in the graph below includes the most important trading currencies for Danish companies (aside from EUR). The specific composition has weakened 13% relative to DKK since the end of 2015, according to the graph below. A weakening of this magnitude has most certainly hit companies that do not systematically hedge their currency risks. By hedging, a company can reduce uncertainty and protect its business.

DKK currency fluctuations relative to USD, GBP, NOK and SEK since January 2013. The example is based on 25% USD, 25% GBP, 25% NOK and 25% SEK. From the data it is evident that a weakening of 13% has occurred from late 2015 until May 2018.

Help’s at hand

We help estimate your company’s foreign exchange exposure as well as provide you with an overview of the different hedging solutions. We will help you set up a currency policy, create a currency account and give you access to the e-Markets portal. Here you can quickly and easily hedge your currency exposure from your laptop, tablet or mobile phone. Wherever you are in fact.

Still not sure whether your company needs a currency strategy? Maybe a glance at This is why corporates need to have a currency strategy from Niels Christensen, Chief Analyst in Nordea Markets will help

Would you like to know more? You are welcome to contact us via markets.dk@nordea.com.

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