Today, FiREapps CEO Wolfgang Koester was invited to discuss currency volatility on CNBC’s Squawk on the Street. [Watch the video on CNBC here]
At one point CNBC anchor, Kelly Evans, asked about the cost of currency hedging, inadvertently repeated a common misconception.
“I wonder … how much companies spend to hedge all of this versus just dealing with the exposure itself,” she said.
“There is still this misnomer that currency hedging is expensive, which was absolutely correct in the past,” said Koester. “But with interest rates having all narrowed … it’s really not nearly as expensive as people [believe]. Especially if you compare that to the impact it can have on a corporation’s market capitalization and of course resulting from their earnings per share.”
Although costs of hedging were once prohibitive, the notion that hedging remains “expensive” is a fallacy that FiREapps frequently encounters.
Simply put, hedging is no longer expensive primarily because of three primary market conditions that did not exist in the past:
- Currencies have become commoditized in the last decade
- Pricing has become more transparent and regulated
- Interest rate differentials have narrowed globally
Hedging = Low-cost Insurance
In fact, when one considers the cost of hedging versus the costs that would be incurred should market events negatively impact your market capitalization, you will quickly realize that hedging amounts to affordable insurance that protects your organization from currency headwinds.
Recently, Koester explored currency hedging in greater depth for Europe’s GTNews.
Want to know more? Contact FiREapps to discuss steps you can take to protect your bottom line.