Leveraging Currency Hedging Strategies to Optimize Export Factoring: A Comprehensive Analysis of Risk Management and Financial Performance

Abstract

This study explores the role of currency hedging in enhancing the performance of export factoring among small and medium-sized enterprises (SMEs). Export factoring serves as a critical financial instrument for SMEs engaged in international trade by improving liquidity and mitigating payment risks. With increasing volatility in foreign exchange markets, many exporters resort to hedging tools to protect against currency fluctuations. The research seeks to evaluate whether these hedging practices deliver measurable financial benefits for SMEs using factoring services. A quantitative approach was adopted for the study. Primary data was collected through a structured questionnaire administered to 31 SME clients of a factoring service provider in India. The data was analyzed using Chi-Square and one-way ANOVA tests to evaluate two primary hypotheses: (1) the impact of currency hedging on financial stability and (2) the relationship between company size and the adoption of hedging strategies. The results revealed no statistically significant relationship between currency hedging and improved financial stability for SMEs involved in export factoring. Additionally, company size did not significantly influence the decision to use currency hedging tools. These findings suggest that, while hedging is commonly practiced, its direct financial benefits in the context of factoring are not guaranteed. The limited impact may stem from the standardized nature of hedging tools, which may not align well with the unique operational models of individual SMEs. The study emphasizes the need for exporters and financial institutions to adopt more tailored and data-driven approaches to currency risk management. Customized hedging strategies, aligned with specific business profiles and transaction patterns, are recommended to improve financial outcomes. Additionally, policy-level support can enhance the integration of effective hedging practices within export financing frameworks. This research adds value by focusing on the underexplored intersection of currency risk management and export factoring among SMEs in emerging economies. It offers practical insights into optimizing hedging strategies and highlights the limitations of one-size-fits-all approaches in dynamic international trade environments.