Volatility in long-term and short-term exchange rates is a significant factor in the financial soundness of companies. Companies that have taken this on board therefore undertake balanced management of the related risks.

By using suitable financial instruments, SMEs may considerably reduce the risks relating to fluctuations in exchange rates and interest rates.

The opinion of Stéphane Christiaens, a Corporate Dealer at Fortis Bank.

Currencies are affected by market trends, resulting in pleasant or unpleasant surprises for companies having to manage future financial flows. Low margins, which are a feature of SMEs, may be eroded sharply by a fluctuation - even a relatively slight one - in the exchange rate for two currencies.

What exactly does hedging mean?
A company that protects itself in advance against risks is in a situation where it considers that the residual risk is compatible with its activities. Let us take the example of a company that intends selling yen in six months' time. If it takes a hedge, it is guaranteed a sale at a predetermined rate, which it considers satisfactory.

If the yen is trading at a more favourable rate on the market at the time of the transaction, the company would have been better off without hedging?
Yes.  But if the rate is less favourable, it will be glad it hedged. A word of warning - risk-management tools are comparable to insurance products, and are not a form of speculation.  We manage several thousand SMEs; they manage their risks, they do not speculate.

What are the main risk-management tools available to companies?
Essentially forward exchange contracts and options.

With a forward exchange contract, it is possible to hedge against the risk of the rate for a currency rising or falling. It is a kind of purchase or sale of currency with deferred delivery.  It is possible to take out a forex outright contract for terms between one business day and a maximum of ten years.
In other words, forex outright contracts make it possible to fix (now) the rates for currencies in which transactions will occur at a later stage.  A company which knows that it will have to buy sterling in four months' time can set - today - the rate at which it will buy the currency. If, at the time of the purchase, sterling has risen, the bank will still provide the company with sterling at the rate set in the agreement.
This is the best solution for transactions that are certain.

Options make it possible for a company to hedge against unfavourable exchange-rate or interest-rate fluctuations, without penalising it in the event of fluctuations that work in the company's favour. An option gives the company the possibility of buying from the bank the right to use a predetermined rate.  This is a right, which it may or may not exercise, depending on the market conditions prevailing at the time of the transaction.
Let us return to the example of the company buying sterling in four months' time. If the rate for sterling is unfavourable to the company, it will exercise its right and receive sterling at the price set. If the market rate is more favourable than the rate set, it will not exercise its option and will effect the transaction at the prevailing rate.
These techniques guarantee the best possible rate. They are especially useful in the case of
transactions that are not certain. So purchasing an option is very similar to taking out an insurance policy.

And insurance means a premium.
Yes.   And as with any insurance, the premium depends directly on the risk covered. The greater the risk, the higher the premium. Studies have shown that the cost of cover tended to affect the competitiveness of some SMEs. This is why we offer products based on combinations of insurance, which makes it possible to reduce the premium.

What types of company use specialist services in the dealing room?
Generally, we tend to deal with medium-sized companies rather than small firms.  For transactions involving less than 50,000 euros SMEs can obtain advice and assistance from their branch or Business Centre.  The Business Centre might refer them to a dealer if required.
In addition, SMEs may have direct access to the dealing room in cases where this is justified.

Does Fortis provide personal follow-up for companies that call upon the bank?
No cover is considered without a face-to-face meeting with the customer. This involves defining very clearly the principles and purpose of the intended transaction and identifying the risks involved. Various factors are weighed up:  an assessment of the uncertainty linked to the transaction, the amount involved, the probable trend for the reference currency, the advantages and disadvantages of the various types of cover - we offer active, personalised advice which makes the company a partner rather than a customer.