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25 Jun 2025

Earning your trust: A 5-step strategy to protect profitability

An unpredictable US president, a transatlantic trade war, escalating conflict in the Middle East: it’s been another volatile month for currency markets.
 

Navigating turbulent currency movements is the new normal. So, choosing the right foreign exchange strategy can be the difference between thriving and merely surviving for UK businesses with international exposure.

Fluctuating exchange rates can erode margins if currency exposures aren’t managed correctly. Industries with high import or export activity, international supply chains or which sell services abroad are particularly vulnerable to an unstable FX market as unfavourable currency movements can reduce profitability.

For example, GBPUSD has moved from a low of 1.21 in January this year to 1.36 in June while GBPCNY has moved from 9.13 to 9.70.
 

GBPUSD YTD
 

GBPUSD YTD Chart


Source: Bloomberg and Investec
 

GBPCNH YTD
 

GBPCNH YTD Chart


Source: Bloomberg and Investec

 

To ensure profit resilience and competitiveness, businesses can benefit from focusing on strategies which help to lock in future profitability.


 

Seven possible FX solutions to consider:
Multi-currency accounts

reduce the need for immediate conversion and facilitate waiting for a more favourable exchange rate. They also reduce reliance on derivatives.

 

Forward contracts

lock in exchange rates for future transactions which provides certainty by protecting margins from sudden currency swings.

 

Vanilla FX options

offer flexibility by allowing businesses to cap downside risk while retaining some upside, albeit at a premium.

 

Zero premium hedging solutions

offer flexibility, do not require an upfront premium and can be tailored to suit a firm’s specific objectives.

Layered hedging

including using multiple forward contracts over different timeframes, can help to manage risk and stabilise margins.

Natural hedging

which involves matching income and expenses in the same currency, can also reduce potential reductions in margins.

Adjusting hedging ratios

based on market conditions can also be effective. This can include reducing hedges when volatility is expected to decrease.

 

Kiran Russell
Kiran Russell - Head of FX Dealing

A well-defined FX strategy allows a business to proactively address its unique challenges, ensures it is prepared for opportunities specific to its structure and market. It also safeguards operational excellence and competitiveness

Kiran Russell outlines a possible hedging strategy for a UK-based travel business to protect margins and foster profitability

A UK travel company operating in the European holiday market faces a fundamental currency mismatch. It sells holidays in GBP to British consumers which it has bought in Euros.

This type of exposure necessitates sophisticated hedging strategies to protect profit margins and ensure commercial viability.

  • Step 1: Track your currency exposure: Forecasting and exposure analysis

    The company uses historical trading data and forward-looking intelligence to anticipate future demand.

    It creates forecasts based on several different scenarios such as a change in UK economic conditions, destination specific events or changes to the competitive environment.

    These scenarios will include a conservative base case as well as, for example, 85% and 115% of the base case.

    Using these scenarios as well as understanding the business's cost structure helps to determine accurate hedge ratios.

  • Step 2: Refine your budget rate: The budget rate and defensive hedging

    The budget rate is a reference exchange rate the company uses for planning. It is determined by combining the minimum desired profit margin, business costs, Euro-denominated costs and currency hedging costs.

    The budget rate will also include a buffer amount to ensure the business has enough funds to sell Sterling when it is required to make payments in Euros.

    The company uses this rate to implement its defensive hedging strategies, including forward contracts to secure downside protection.

  • Step 3: Understand your target rate

    The target rate is an aspirational rate, set above the budget rate to achieve a competitive advantage.

  • Step 4: Structure a solution: Layered hedging strategy example

    The company hedges 60-70% of its exposure, regardless of FX rate movements, to ensure a base level of protection.

    It then hedges a further 15-20% when FX rates reach the upper third of their 12-month range, to capitalise on favourable currency conditions.

    The final 10-15% is hedged when the FX rate reaches the business’ target rate.

    This strategy allows the company to navigate currency risk and protect margins.

  • Step 5. Talk to the experts to review and monitor your strategy

    All hedging strategies must be monitored. In this example, the company should maintain and monitor daily FX rates and analyse the pace of bookings, so it can adjust its hedging protocols when appropriate.  

    Hedging can be a powerful tool to manage risk and protect financial interests. By carefully selecting and implementing an appropriate FX strategy a business can guard against adverse currency movement and stabilise cash flows. In today’s unpredictable economic environment, hedging is not just an option but vital for securing business resilience and financial security.

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Meet our expert

Kiran Russell

Kiran Russell

Head of FX Dealing

Kiran leads the FX Dealing desk at Investec, where he has worked for nearly 11 years, following a decade at Barclays Capital. His team, which includes FX strategists, structurers, and dealers, provides tailored FX risk management solutions for Investec's institutional and corporate clients. They produce insightful market commentary and analysis to help clients make informed decisions, collaborating closely with our economists and traders.

The FX Dealing desk shares several clients with Investec's lending and brokerage desks, as well as with our Private Bank and Wealth clients.

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