If you run an Australian business that imports goods — whether it is electronics from Japan, raw materials from China, or machinery from Germany — you are exposed to currency risk whether you think about it or not. Every time the Aussie dollar drops, your costs go up. And in recent years, those swings have been significant enough to make or break profit margins.

Currency hedging is the practice of locking in exchange rates in advance to reduce that uncertainty. It will not make you money, but it can stop you from losing it.

Why Hedging Matters

Consider a simple example. You are an Australian retailer importing US$500,000 worth of stock each quarter. At an exchange rate of 0.67, that costs you roughly A$746,000. If the Aussie drops to 0.62 by the time you need to pay, the same shipment now costs A$806,000 — an extra A$60,000 that comes straight off your bottom line.

For small and medium businesses with thin margins, a move like that can be devastating. Hedging does not eliminate the risk entirely, but it makes your costs more predictable, which is essential for budgeting, pricing, and planning.

The Basic Tools

There are three main hedging instruments that Australian importers typically use. Each has trade-offs.

Forward Contracts

A forward contract locks in an exchange rate for a specific amount of currency on a specific future date. You agree today to buy US$500,000 in 90 days at, say, 0.6550. No matter what happens to the spot rate between now and then, you pay 0.6550.

Pros: Simple, predictable, no upfront cost (though a margin deposit may be required). Cons: You are locked in. If the Aussie rallies to 0.70, you miss out on the better rate.

Forwards are the most widely used hedging tool for Australian importers and are available through most banks and specialist FX brokers.

Options

A currency option gives you the right — but not the obligation — to buy currency at a predetermined rate. Think of it as insurance. You pay a premium upfront, and in return you are protected if the exchange rate moves against you. But if the rate moves in your favour, you can let the option expire and transact at the better market rate.

Pros: Downside protection with upside flexibility. Cons: The premium can be expensive, particularly in volatile markets. For a three-month AUD/USD option, premiums might run 1-3 per cent of the notional amount.

Natural Hedging

This is not a financial instrument at all. Natural hedging means structuring your business so that your foreign currency revenues offset your foreign currency costs. For example, if you import goods priced in US dollars and also export products invoiced in US dollars, the two flows partially cancel each other out.

Pros: No transaction costs, no counterparty risk. Cons: Only works if you have offsetting currency flows, which many import-only businesses do not.

How Much Should You Hedge?

This is the question every importer wrestles with, and there is no single right answer. Some general principles:

• Hedge your known exposures. If you have a confirmed purchase order for delivery in 90 days, hedging that amount is prudent risk management.
• Leave some room for upside. Many businesses hedge 50-75 per cent of their expected exposure, leaving the remainder unhedged to benefit if the currency moves favourably.
• Match the tenor to the exposure. Do not hedge twelve months out if your payment cycle is quarterly. Over-hedging creates its own risks.
• Review regularly. Currency conditions change. A hedging strategy that made sense six months ago may not be appropriate today.

Choosing a Provider

Australian importers can hedge through their bank, but it is worth shopping around. Specialist FX brokers often offer tighter spreads and more flexible contract sizes than the big four banks. Some also provide risk management advisory services that can help you build a structured hedging programme.

When comparing providers, look at the total cost — not just the exchange rate, but also any fees and margin requirements.

Common Mistakes

A few traps that importers fall into regularly:

• Hedging reactively. Scrambling to lock in a rate after the currency has already dropped is not hedging — it is panic. Build a policy and stick to it.
• Over-hedging. Locking in more currency than you need can leave you with obligations at a rate worse than the market.
• Ignoring the cost of inaction. Doing nothing is itself a bet — a bet that the currency will not move against you.

The Bigger Picture

Currency hedging is not glamorous, but for Australian importers it is one of the most practical tools available for protecting margins. In an environment where the Aussie dollar can move five or ten cents in a quarter, ignoring currency risk is not a strategy — it is a gamble.

Talk to your FX provider, understand your exposure, and put a plan in place. Your future self will thank you.

James Hargreaves is a Sydney-based financial journalist covering currencies and macro markets.