“Micro-hedging”

definition

Micro-hedging is a currency management strategy that consists of hedging each transaction as it occurs. Unlike in other strategies whereby users take protective action after reaching a certain nominal threshold, micro-hedging executes hedges to protect against individual exposures immediately.

This strategy benefits companies with significant foreign exchange transaction volumes in low amounts, as is the case of e-commerce firms, travel agencies, tour operators and Adtech companies.

For example, think of an online travel agency that books hundreds of hotel beds a day in multiple currencies. Instead of waiting for a certain nominal number of payables/receivables to come in before hedging, they may choose to hedge each transaction. This way, they protect their profit margins, revenue and obligations from the FX market at the very start of the exposure.

Due to the continuous trading activity required, this strategy cannot be applied manually. It requires technological solutions that are able to automate currency trades, like Kantox’s Dynamic Hedging.