Before you do anything else, figure out your risk appetite.
Before you compare products or providers, you need to decide how much exchange rate uncertainty your business is willing to live with. For example, Wise Risk provides three pre-built strategies, ranging from fully protected from, to intentionally exposed to market volatility.
Most conversations around currency risk jump straight to instrument type. Forward or option, bank or broker, hedge now or wait. Those questions matter, but they all sit downstream from one question that usually goes unasked: how much exchange rate uncertainty can my business comfortably carry? Answer that first, and the downstream decisions stop feeling arbitrary.
What does risk appetite mean?
It’s the amount of variability in your currency costs you are prepared to live with in exchange for the chance of a better financial outcome. A business running tight, fixed-price contracts may want close to no variability, because one bad swing eats into a margin that is extremely difficult to replace. Another business with more headroom and market awareness may accept more movement, in return for upside when the rate swings in a favorable direction. Neither is right or wrong. It just depends on the business.
Why decide this before choosing a tool?
The tool is the expression of the appetite, not the other way around. If you know you want near-total certainty, appetite points one way. If you’re willing to purposely take on more risk, it points another direction. Choosing an instrument before you’ve settled on the appetite is how businesses end up over-hedged, under-hedged, or paying for protection they didn’t need or want.
How does Wise Risk help frame the choice?
Wise Risk is our automatic hedging tool which has three wide-ranging strategies we believe are great examples of how to approach your appetite decision:
- Our Disciplined strategy is cautious and protective, in which you hedge around 90% of your identified exposure as your business wants maximum budget certainty
- Our Balanced strategy covers roughly 75%, leaving around 25% open to the market, which is great if you want some benefit from favorable currency moves.
- Our Opportunity strategy hedges closer to 50% of your exposure, which is good for businesses actively watching the market and ready to act on market swings.
While we think these strategies are helpful in contextualizing how you can think about this question, this is not official investment advice.
Where should your appetite number actually come from?
From your business, not the market. Your contract structure, your margins, how much volatility your cash flow can absorb. The market’s job is to be uncertain. Your job is to decide how much of that uncertainty you are willing to take on.