Hedging is not speculation — it is risk management

It is common to hear business owners say that they don’t speculate on currencies.

However, any company with foreign currency receivables or payables is already exposed to FX risk. The relevant question is not whether a company speculates. The relevant question is whether that exposure is actively managed or left unmitigated.

Speculation involves assuming a new market risk with the objective of generating profit from price movements. Hedging involves reducing or neutralizing a risk that already exists as a result of operating activities.

If a company is required to settle USD 100,000 in 90 days, the FX exposure exists regardless of whether a hedge is executed. Entering into a hedge does not create risk — it addresses an existing one.

An illustrative example

An FX forward is a contractual agreement to fix today the exchange rate at which a specified amount of foreign currency will be bought or sold at a future date.

It is not a trading position. It is an agreed price for a future cash flow.

Assume a company must pay USD 100,000 in three months.

The company enters into a forward contract today at an exchange rate of 20.5. This locks in a total MXN outflow of: 100,000 × 20.5 = 2,050,000 MXN

At settlement

• If the spot rate is 22:

  Without a hedge, the company would pay: 100,000 × 22 = 2,200,000 MXN

  The hedge generates a positive P&L of 150,000 MXN, offsetting the higher spot rate.
  Effective cost remains 2,050,000 MXN.

• If the spot rate is 18:
  Without a hedge, the company would pay: 100,000 × 18 = 1,800,000 MXN
  The hedge generates a negative P&L of 250,000 MXN.

  Effective cost remains 2,050,000 MXN.

In neither case is the objective to profit from FX movements. The objective is to eliminate uncertainty around a known obligation.

The real risk is doing nothing

Choosing not to hedge is also a decision.

Allowing an FX exposure to remain open means accepting that operating margins will fluctuate with market movements. This implicitly transfers pricing power from management to the FX market.

That outcome may be intentional, but it should be recognized as a risk decision, not a neutral stance.

At Yarda, we view FX hedging as a tool for protecting operating performance, not expressing market views.