Hedging

Trend Definition 

What is the essence of this trend? What is its impact? 

• Essence: Hedging is a financial strategy used to mitigate risks associated with price or currency fluctuations in international trade through financial instruments
• Impact: While Hedging does not eliminate risks, it effectively transfers them, providing a layer of security against market volatility. It helps businesses manage costs more predictably and maintain profitability, even in an unstable economic environment

Trend Drivers 

Why is this trend emerging now? What’s changing? 

• Increasing Currency Volatility: Fluctuations in currency exchange rates have become more frequent and unpredictable due to political and economic developments that lead to higher uncertainty in certain regions
• Inflationary Pressures: Inflation can unpredictably affect the cost of goods, making Hedging important for cost management and profit stability
• Global Economic Uncertainty: Uncertainties, such as those caused by trade wars, pandemics, and political tensions, increase the risks of financial losses associated with a globalised business model

Use Cases 

How to apply this trend? 

• Currency Hedging: Denominating revenues in three currencies 
  Example: Airbus denominates most of its revenues in USD, mostly through natural Hedging, followed by EUR and GBP to minimise the impact of the USD’s volatility on their EBIT
• Ensuring Currency Stability: Twofold hedging strategy
  Example: To ensure a certain stability in procurement prices, BMW spend money in the currency of their respective revenue, and they set up regional treasury centres 

Procurement Relevance & Response Strategies 

How should Procurement adapt its Processes, Organisation, and Strategy?

• Risks and Strategy: After identifying and prioritizing procurement risks, it is important to determine the appropriate strategy, for instance forward, future, and options contracts
• Partner, Monitoring, and Adjust: Choosing a procurement-experienced partner is equally as important as monitoring and adjusting the Hedging contract