Currency hedging mistakes cost UK businesses millions each year. While 92% of large corporations use hedging strategies, less than 10% of SMEs do – and many of those that try get it wrong.
Here are the seven most expensive mistakes we see businesses make, and how to fix them before they hit your bottom line.
1. Over-Hedging Your Actual Exposure
Over-hedging happens when you protect more currency than you actually need. A manufacturing business expecting €80,000 in quarterly sales hedges €120,000 "to be safe." When the euro strengthens against sterling, that extra €40,000 hedge becomes a direct loss.
The problem is simple: you’ve created a speculative position you never intended to have.
How to Fix It:
- Calculate your real exposure before placing any hedges
- Use rolling forecasts based on confirmed orders, not wishful thinking
- Start conservative: you can always add more hedging later
- Review your exposure monthly as business conditions change
Over-hedging typically costs businesses 2–5% of their hedged amount when market moves go the wrong way.
2. Chasing the Cheapest Option Every Time
Many SMEs avoid currency options because of the upfront premium, then wonder why they're stuck with unfavourable rates when markets move against them. A software company refuses to pay a £2,000 option premium to protect a $200,000 contract, then loses £15,000 when the dollar weakens.
Focusing solely on upfront costs ignores the bigger picture of risk management.
How to Fix It:
- Compare the premium cost to your potential loss exposure
- Consider that forward contracts have hidden costs in their rates
- Factor in the value of flexibility when markets become volatile
- Calculate the worst-case scenario cost of being wrong
The premium might feel expensive, but it's usually cheaper than the alternative when things go sideways.
3. Ignoring Market Volatility Completely
Treating all currency environments the same leads to poor hedging decisions. Using rigid forward contracts during uncertain times locks you into rates that might become terrible deals within weeks.
During Brexit uncertainty, a UK exporter locked into a 12-month EUR/GBP forward at 1.12, then watched the rate climb to 1.18 while stuck in their contract.
How to Fix It:
- Check implied volatility levels before choosing your hedging tool
- Use more flexible tools (like options) during uncertain periods
- Avoid long-term fixed commitments when economic uncertainty is high
- Keep some positions unhedged to benefit if markets move in your favour
Volatility isn’t your enemy: ignoring it is.
4. Using Only Forward Contracts for Everything
Forward contracts work well for predictable cash flows, but they're not suitable for every situation. A consultancy business uses forwards for all their international invoices, including speculative project work that might not happen.
When two large projects get cancelled, they're left holding forward contracts they can't use, creating unwanted currency exposure.
How to Fix It:
- Match forwards to confirmed, definite cash flows only
- Use options for uncertain or speculative transactions
- Consider natural hedging by matching currency income with expenses
- Keep a mix of tools available for different types of exposure
Different exposures need different solutions. One size doesn't fit all.
5. Terrible Timing on Hedge Execution
Poor timing costs money whether you're too early or too late. Some businesses hedge immediately when they see a favourable rate, without considering their actual payment schedule. Others wait for "better" rates that never come.
A manufacturer sees GBP/USD at 1.30 and immediately hedges six months of payments, not realising their actual payments don't start for three months. The rate improves to 1.35 before they need the dollars.
How to Fix It:
- Align hedge timing with your actual payment schedules
- Use systematic approaches rather than trying to time markets
- Consider averaging into positions over time for large exposures
- Set rate targets based on your budget needs, not market predictions
Perfect timing is impossible. Sensible timing is essential.
6. Rolling Monthly Hedges Regardless of Cash Flow
Many businesses automatically roll their hedges monthly because it seems systematic. This creates unnecessary friction with banks and doesn't align with actual business needs.
A trading company rolls €50,000 forwards every month, but their supplier payments actually happen quarterly. They're constantly adjusting positions that don't match their cash requirements.
How to Fix It:
- Set hedge maturity dates based on your actual payment schedules
- Use ladder strategies where different hedges mature when you need the currency
- Match hedge amounts to specific invoices or contracts where possible
- Review your payment patterns quarterly and adjust hedge timing accordingly
Your hedging schedule should follow your business calendar, not arbitrary monthly periods.
7. No Clear Strategy or Proper Exposure Assessment
The most expensive mistake is having no coherent approach at all. Many SMEs hedge reactively, making decisions based on today's headlines rather than systematic risk assessment.
A property developer hedges randomly when currency moves make the news, sometimes over-hedged, sometimes completely exposed, with no clear policy on what they're trying to achieve.
How to Fix It:
- Document your currency exposures by type and timing
- Set clear objectives for what you're trying to protect
- Create simple policies for when and how much to hedge
- Review your strategy quarterly, not just when markets are volatile
- Get professional advice to establish your initial framework
Having no strategy guarantees you’ll make expensive mistakes when markets move quickly.
Getting Currency Hedging Right
Most of these mistakes stem from treating currency hedging as an afterthought rather than a core business process. The businesses that get it right treat currency risk like any other business risk: they measure it, manage it systematically, and review it regularly.
Start simple: identify your biggest currency exposures, choose appropriate tools for each type of risk, and stick to your plan even when markets get exciting.
If you're making any of these mistakes, you're not alone – but you don't have to keep making them. The cost of fixing your approach is almost always less than the cost of getting it wrong when markets move against you.
Quick wrap-up for SMEs
- Map exposures by currency, amount and timing; separate confirmed from forecast.
- Set a budget rate and tolerance so you know when to act.
- Match tools to certainty: forwards for confirmed cash flows; options for uncertain ones; use natural hedges where possible.
- Align maturities with invoices and cash flow; ladder hedges and use tranches rather than all at once.
- Review monthly, formalise quarterly; measure results against your budget rate, not spot.
- Avoid over-hedging; keep pricing transparent (margin, forward points, option premiums).
SME FX hedging FAQs
How does a currency hedge work?
A hedge turns an unknown future exchange rate into a known outcome. Forwards fix a rate for a future date. Options set a worst-case rate (you pay a premium) while keeping upside if the market moves in your favour.
How can I hedge currency risk?
Identify what needs protecting (currency, amount, date), choose the right tool (forward, option, natural hedge), and execute in tranches aligned to cash flow. Monitor exposures and adjust as orders are confirmed or change.
What is the best way for SMEs to manage FX hedging?
Use a simple, policy-led programme: map exposures, set budget rates, define hedge ratios by horizon (e.g., higher cover in the next 3–6 months), pick instruments based on certainty, and review regularly.
Are forwards or options better?
It depends on certainty and flexibility. Forwards have no upfront premium but commit you to a rate and amount. Options cost a premium but provide protection and flexibility when cash flows or markets are uncertain.
How much does hedging cost?
Total cost includes the provider's margin in the rate, forward points from interest rate differentials, and any option premium. Compare this to the potential loss from an adverse move versus your budget rate.
Take The Next Step
We help SMEs design practical, no-nonsense hedging strategies that actually make sense for their business. No jargon, no over-engineering: just sensible risk management.
Get in touch at info@okumarkets.com or
0203 838 0250 for a straight-talking review of your currency risks.
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