Procurement Glossary
Exchange rate fixing: Hedging against currency risks in Procurement
November 19, 2025
Exchange rate fixing is a key instrument in international Procurement hedging against currency fluctuations. Companies use this strategy to ensure planning security in cross-border procurement processes and minimize incalculable cost risks. Find out below what exchange rate fixing means, what methods are available, and how you can successfully manage currency risks.
Key Facts
- Fixed exchange rates protect against unpredictable currency fluctuations when making international purchases.
- Forward transactions and options are the most common hedging instruments.
- The costs of hedging must be weighed against potential losses.
- Legal frameworks vary depending on the country and currency
- Digital tools now enable automated hedging strategies
Contents
Definition: Exchange rate fixing
Exchange rate fixing refers to strategic hedging against currency risks through contractual agreements or financial instruments.
Fundamentals of currency hedging
When fixing exchange rates, future cash flows in foreign currencies are hedged at a rate set today. This is done using various financial instruments:
- Forward exchange transactions for fixed exchange rate hedging
- Currency options for flexible hedging
- Swaps for long-term positions
- Natural hedging through currency balancing
Fixed exchange rates vs. currency speculation
In contrast to speculation, exchange rate fixing serves exclusively to minimize risk, not to generate profits. While speculators deliberately take currency risks, buyers systematically eliminate them through exchange rate clauses or financial instruments.
Importance in strategic Procurement
Fixed exchange rates enable precise budget planning and cost calculation in international supplier relationships. They protect against unexpected additional costs and stabilize procurement costs over longer periods of time.
Methods and procedures for fixing exchange rates
The choice of the appropriate hedging method depends on risk tolerance, transaction volume, and time frame.
forward exchange transactions
Forward transactions offer complete price certainty at an exchange rate agreed today. They are particularly suitable for predictable cash flows with fixed maturity dates. The costs arise from the difference between the spot and forward rates.
currency options
Options grant the right, but not the obligation, to trade at a specific price. This flexibility allows investors to participate in favorable price developments while protecting themselves against losses. The option premium represents the hedging costs.
Natural hedging
By offsetting receivables and liabilities in the same currency, companies reduce their net currency risk. This method works particularly well with netting procedures and diversified supplier portfolios without additional financing costs.
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Important KPIs and targets
Successful currency hedging requires continuous monitoring of relevant key figures and performance indicators.
hedging ratio
The ratio of hedged to unhedged currency positions indicates the degree of hedging. Typical target values range between 70-90% for critical currencies. A ratio that is too low increases risk, while one that is too high prevents opportunities from being exploited.
hedging costs
The costs of currency hedging in relation to the transaction volume should be monitored regularly. Target values vary depending on the currency and term, typically 0.5-2% of the hedged volume per year.
Volatility ratios
The historical and implied volatility of the relevant currency pairs influences hedging strategies and costs. High volatility requires more active management and may justify higher upfront agreements.
Risks, dependencies and countermeasures
Exchange rate fixing involves specific risks that can be minimized through appropriate strategies.
Opportunity costs
Full hedging prevents participation in favorable exchange rate developments. Companies miss out on potential savings when currencies develop favorably. Partial hedging strategies can reduce this risk.
counterparty risk
The creditworthiness of financial institutions affects the security of hedging transactions. Bank or broker defaults can lead to significant losses. Diversification of financial partners and regular credit checks minimize this risk.
Liquidity risks
Margin calls on derivative instruments can create unexpected liquidity requirements. Sufficient liquidity reserves are necessary, especially in volatile markets. Credit limits and credit lines should be set accordingly.
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Practical example
A German automotive supplier purchases electronic components worth USD 10 million from an American supplier. Due to the six-month delivery period and volatile USD/EUR exchange rates, the company opts for a combination of forward contracts (60%) and currency options (40%). The forward contract hedges USD 6 million at a rate of EUR/USD 1.18, while the options offer protection against further dollar strength at a strike price of EUR/USD 1.20, but allow participation in dollar weakness.
- Planning security for 60% of the volume through fixed exchange rate hedging
- Flexibility for 40% with favorable price development
- Total cost of hedging: 1.2% of the transaction volume
Current developments and effects
Digitalization and volatile markets are shaping the development of modern currency hedging strategies in Procurement.
Automated hedging systems
AI-powered platforms analyze currency risks in real time and automatically execute hedging transactions. These systems take into account market volatility, correlations, and company policies to make optimal hedging decisions.
ESG-compliant currency strategies
Sustainability criteria are increasingly influencing the selection of financial instruments and banking partners. Companies are integrating ESG factors into their currency hedging and prefer transparent, ethical financial products.
Blockchain-based solutions
Smart contracts enable automatic currency hedging for international payment plans. This technology reduces transaction costs and increases transparency in cross-border procurement processes.
Conclusion
Exchange rate fixing is an indispensable tool for companies with international procurement activities. Striking the right balance between risk protection and cost efficiency requires a well-thought-out strategy and continuous monitoring. Modern digital solutions now enable more efficient and automated hedging approaches. Successful currency hedging contributes significantly to planning security and competitiveness.
FAQ
What does fixing an exchange rate cost?
The costs vary depending on the instrument and market conditions. Forward transactions typically cost 0.1-0.5% of the volume, options 1-3% as a premium. Natural hedging does not incur any direct costs, but requires appropriate structures.
When should currency risks be hedged?
Hedging is recommended for significant foreign currency positions, long delivery times, and volatile currencies. Fixing exchange rates is particularly advisable for critical components or tight margins in order to ensure budget security.
Which currencies should be hedged as a priority?
USD, GBP, and CHF often exhibit high volatility and should be hedged for larger volumes. Emerging market currencies require special attention due to higher risks and limited hedging opportunities.
How does exchange rate fixing affect liquidity?
Derivative instruments can trigger margin calls and tie up liquidity. Companies should maintain sufficient credit lines and adjust their liquidity planning accordingly in order to be able to cope with unexpected payment requests.
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