How to hedge currency

Conrad Cranfield has been running the online clothing retailer Natureshop for two years, and 95% of his turnover comes from exports. His business isn’t rocket science, he says, so he has felt confident making decisions on currency.

The company is paid in a number of currencies including sterling, euro, yen and the Australian, New Zealand and US dollars. The diversity of currencies allows Cranfield to offset a lot of the firm’s costs, rather than paying for everything in New Zealand dollars.

While most small companies do not hedge, the high dollar means it’s increasingly tempting. “It is scary times — the New Zealand dollar is above 70 cents to the US dollar and above 80 cents to the Aussie!” said one export analyst as Unlimited went to press.

“Usually, bigger companies like Fisher & Paykel have no choice but to hedge as they have operations outside New Zealand ... so it is all dependent on the individual companies,” she says.

Some companies don’t bother with hedging at all; they just set up foreign currency accounts and hold the currency until it is favourable enough to convert.

Because currency fluctuations make a “huge difference” to his margins, this is precisely what Cranfield plans to do. He’s aiming to put more and more of the company’s expenses into foreign currency and ideally he wants to start paying Icebreaker and Emu Australia, his two major suppliers, in US dollars.

With the Kiwi reaching over 70 cents to the US dollar, Cranfield also intends to forward buy on 30-, 60- and potentially 90-day terms. When he started the New Zealand dollar was sitting at 60 cents to the US, but his margin is allowing him to take up to 80 cents. “It [forward buying] will give us a bit more budgeting certainty,” he says.

Although he has sought advice from his accountant, like many startup businesses he is making these currency decisions largely on his own.

But if the DIY approach is too unnerving, there are several foreign exchange risk management specialists in New Zealand to worry about your currency for you.

Earl White, director of financial market risk management advisers Bancorp, helps companies — small and large — figure out their risk policy on hedging currency.

Companies need to figure out what risk they can accept then decide on a hedging strategy. But it’s important to realise that the currency does move a lot every year, he says. “It should not be a surprise that currency goes up 10% to 20%.”

Once a firm has decided its hedging strategy, it’s important to stick to it. One of White’s bugbears is companies who finalise their policy, only to change it on the hoof after receiving ill-informed advice from a mate.

He remembers one large New Zealand organisation “which is no more” where the CEO overrode his hedging policy “because one of their mates said do X”. And then of course “the currency did Y”, says White. “People think they are an expert on currency because they’ve bought some travellers’ cheques.”