What is Financial Hedging?
Financial hedging is the use of derivative or other instruments to offset the risk of adverse movements in prices, rates, or exchange rates. It does not eliminate risk but transforms it.
How It Works
- Identify the exposure (FX, rate, commodity).
- Select an instrument (forward, swap, option) and a hedge ratio.
- Apply hedge accounting under IFRS 9 if eligible.
Saudi Context
The SAR-USD peg removes most USD FX risk, but Saudi firms still hedge EUR, JPY, and CNY exposures, plus commodity inputs (gas, polymers) and SAMA-driven SAIBOR moves.
Example
A Saudi importer with EUR 10 million payable in 6 months buys a forward at SAR 4.20/EUR to lock in the rate.