How do you manage currency risk when you buy in USD and sell in EUR?

When you buy in US dollars and sell in euros, your margin depends on the exchange rate on the day you pay your supplier, not on the day you closed the deal. In dairy ingredient trading, with margins of a few percent, a moderate move in EUR/USD can turn a profitable deal into a loss. Managing currency risk means knowing your currency position and covering it where needed.

An example

With illustrative figures: you buy 100 t of whole milk powder at USD 3,500 per tonne (USD 350,000) and sell it at €3,300 per tonne (€330,000). Payment to the supplier is due in three months.

• At the rate on the contract date, EUR/USD 1.10, the purchase costs €318,182. Expected margin: €11,818.
• If the rate is 1.05 on the payment date, the purchase costs €333,333. Result: a loss of €3,333.

A currency move of under 5% wiped out a margin of more than 3%.

Where the exposure comes from

• Time between deal and payment. The longer the period between fixing the price and paying, the larger the risk. Contracts with call-offs over several months stretch this period.
• Different currencies on purchase and sale. Typical for traders buying from the US or Oceania and selling in Europe, or the other way around.
• Costs in a third currency. Ocean freight is often charged in USD, even when both the purchase and the sale are in EUR.

How traders cover currency risk

• Forward contracts. You agree a fixed exchange rate with your bank for a future date. This is the most common hedge for physical traders: it matches a known payment on a known date.
• Matching currencies. Buying and selling in the same currency, where the market allows it, removes the risk for that deal.
• Currency options. These give the right, but not the obligation, to exchange at a set rate. They cost a premium up front.

Whichever instrument you use, link the hedge to the physical deal. If a delivery shifts by a month, the hedge needs to shift with it. If a customer takes only part of the quantity, part of the hedge is no longer needed.

Your currency position

Your currency position is the total of your open payments and receipts per currency, minus what you have already hedged. It works like your product position: per currency and per period, so you can see which months are uncovered. For product positions, see How do you track your position in dairy ingredient trading?

Currency hedging in Moo Software

In Moo Software, currency hedges can be linked directly to physical purchase and sales contracts, either one by one or as bulk hedges covering several contracts. You monitor your currency position, and the precalculation shows the expected result of a deal based on purchase, transit and sales costs. After delivery, you compare the realised result with the precalculation and trace differences back to exchange rates and hedges. Purchase and sales invoices can be made in any currency. More in Finance & Administration.

Currency hedging is separate from hedging product prices with futures. For that, see Todo sobre el módulo de Futuros en Moo.

Frequently asked questions

How much of my currency exposure should I hedge? That is a policy decision for your company. A common approach is to hedge confirmed, fixed-price deals in full and leave deals that are not yet final unhedged. Agree the policy in advance, so individual traders do not decide case by case.

What happens to my hedge if the deal falls through? The forward contract with the bank remains. You can use it for another deal in the same currency or close it out with the bank, which can result in a gain or a loss.

Does a back-to-back deal also carry currency risk? Yes, if you buy and sell in different currencies. See What does back-to-back trading mean and how do you manage it?

See it with your own contracts

Want to see how currency hedges and precalculations work in Moo? Reservar una demostración or contáctanos.