Driven by energy market volatility, inflation remains persistent in 2026. In fact, it’s one of the most persistent inflationary periods in modern US history, with an uninterrupted stretch of above-2% monthly Consumer Price Index (CPI) since early 2021.
Inflation is painful for consumers, but it also negatively impacts businesses. As the general price level of goods, utilities, and services increases, a business faces higher operating costs, tighter cash flow, compressed margins, and reshaped competition. For example, an importer may suddenly have to accommodate a price increase from a manufacturer, who’s also trying to minimize the impact of inflation, making budgeting decisions more complex. Inflation also causes economic uncertainty, further complicating borrowing and investment decisions.
Moreover, inflation affects currency exchange rates. Central banks might attempt to curb high inflation by increasing interest rates. This makes a currency more appealing to investors and increases its value. On the flip side, when inflation is low, interest rates simmer down, and the currency value decreases.
For businesses that operate internationally, currency fluctuation can detrimentally impact their ability to manage costs and cash flow. To help protect their business against currency fluctuations and inflation, many turn to FX risk management tools, or currency hedging.
What is currency hedging?
When a small business imports goods or services, a decrease in the value of the currency that the business pays in can lead to higher costs. For an exporter, an increase in the currency they receive can have a detrimental impact on cash flow. Hedging forex is a strategy that can help businesses minimize the impact of these market shifts on their operations. It involves the use of financial instruments to lock in exchange rates for future transactions, helping reduce exposure to the risk of volatile exchange rates.
Let’s say a US-based business is importing goods from Europe every six months. If the currency exchange rate is $1.2/€1, the business plans for a cost of $1.2 million. However, if the euro depreciates against the US dollar over the next six months, the business may end up paying more in US dollars for the same amount of goods. To minimize this risk, the business could utilize a currency hedging tool to lock in the current exchange rate and ensure that it will pay $1.2 million regardless of future currency movements.
It’s important to note that Convera’s hedging products are derivative financial instruments which may expose you to risk should the underlying exposure you are hedging cease to exist. They may be suitable if you have a high level of understanding and accept the risks associated with derivative financial instruments that involve foreign exchange and related markets. If you are not confident about your understanding of derivative financial instruments, or foreign exchange and related markets, we strongly suggest you seek independent advice before making the decision to use these instruments.
What are common currency hedging tools for businesses?
FX risk management can provide a level of certainty and stability that allows a business to predict costs and cash flow more accurately; however, which financial instrument a business uses will depend on individual objectives and risk appetite.
The most common financial instruments include:
- Forward contracts: A hedging tool that lets a business lock in the current exchange rate for an agreed period of time. Forwards offer exchange rate certainty and an obligation to trade at the chosen exchange rate even if the market shifts in a business’ favor.
- FX options: FX options allow a business to lock in an exchange rate that can protect from adverse currency shifts, while offering the opportunity to take advantage of favorable shifts in the market. Usually, FX options require payment of an upfront premium.
- Global currency accounts: A global currency account lets a business hold funds in foreign currencies, helping to manage the risk of unfavorable exchange rates. Often called natural hedging, this approach allows a business to match foreign currency income with expenses in the same currency by holding and using balances in its global currency accounts.
Learn how to develop an effective currency hedging strategy.
Staying ahead of inflation with currency hedging
To succeed in an inflationary environment, businesses must be able to adapt to changing economic conditions and manage their costs effectively. Currency hedging is a valuable risk management strategy to help businesses minimize the negative effects of inflation. Using financial instruments, such as global currency accounts, FX options, and forward contracts, businesses can position themselves to protect against adverse currency movements, better manage cash flows, control costs, and remain competitive.
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