Corporate FX Hedging Policies

A written plan helps provide clarification. This ensures all parties objectives and actions are aligned. It also supports implementation and reduces uncertainties.

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Please kindly contact Jack Georgeson directly regarding all FX Hedging Policy Questions and Enquiries.

Phone: +44 (0) 203 854 6802

Email: jackgeorgeson@gsnfx.co.uk

FX Hedging Policy Framework

When developing an FX Hedging Policy, there are a number of key variables

Quantity

What percentage of our FX exposure should we protect.

Timescale

Over what timeframe should we hedge into the future.

Frequency

At what intervals should we monitor, review and rebalance our cover.

Foreign Exchange Hedging Policy

We help develop a clear plan which is agreed by all parties.

Clarification
  • Agreed in writing
  • Simple and easy to implement
  • Monitored and rebalanced at planned intervals
Design, Build, Maintain
  • We develop, implement and maintain strategies
  • Monitor hedge levels versus your policy
  • Calculate rebalance values
  • Review and update
Currency Hedging Policy Goals

An FX policy will be structured and aligned closely with a companies risk management goals.

Time Saving

Reduced time spent administering and managing currency risk.

Forecasting

Less emphasis on exchange rate forecasting and predicting trends.

Implementation

Less uncertainty and discretion when executing and managing currency risk.

Approved

A clear and written strategy with all stakeholders aligned.

Where Can We Help?

We offer support and guidance throughout the process from concept to execution.

Design and Build

New Corporate FX hedging policies.

Analyse and Assess

Existing FX Hedging Policies


Full Support

Implementation
Monitoring
Maintenance
Rebalancing

FX Hedging Policies for Companies

Foreign Exchange Hedging Policies

Businesses and groups that operate internationally should ensure they have considered their international exposures and the possible risks that come with working and operating in multi-currency markets. FX volatility and fluctuating foreign exchange rates can have a material impact upon company costs, margins and balance sheet translational values. Fluctuations in FX rates could affect commercial profit margins, cost competitiveness and the valuation of any international operations.

Before confirming business FX hedging plans it is often useful to create an auditable policy that sets out the framework for managing any international FX exposures. These plans can help companies align their business plans and goals, manage risk tolerance, act as a performance measure and provide the basis for accounting activities to report FX hedges in financial statements.

A Comprehensive FX Hedging Plan

Creating an FX Hedging Policy

A well planned FX hedging policy will enable a business to manage commercial FX risks and safeguard business costs, operating margins, assets and liabilities. It also showcases a company or group ability to effective manage corporate governance to investors and stakeholders such as banks, lenders, financial services providers and investors.

FX hedging policies can usefully be built around the current market conditions and also around the organisation’s current needs. Therefore, although detail is essential when setting out the FX hedging policy workflow, the document must be usable and flexible to stakeholders at all levels.

It needs to be understandable so it is not an obstacle that is seen as a burden to stakeholders. Additionally, it should be flexible to allow for any regulatory changes in the market or any business expansion into new territories and markets.

What Should an FX Hedging Policy include?

Foreign Exchange Policies Framework

FX policies are typically made up of six important components, which we will look at in more detail here:

Objectives

The first step in creating a foreign exchange policy is to set some clear objectives that are relevant and measurable. These should include financial goals, which exposures need to be hedged, and your business’s risk tolerance.

In addition, your objectives should define what exposures and risk components need to be hedged. For example, import or export contract risks, international project risks, order book risks, balance sheet risks, forecast earnings risk, forecast cost risks or cash flow risks.

Definitions

Any foreign exchange policy should include clear definitions of terms to ensure a consistent approach throughout the business. This is because it can be used for internal communications and will ensure that the policy can be clearly understood by stakeholders at all levels.

Companies may, for example, define some of the following terms for clarity. Which business representatives are authorised to secure FX hedges, what types of FX products can be used, what the business defines as FX derivative.

FX Hedging Policy Strategies

Foreign Exchange Hedging Policy Strategies

Strategies

In this policy section, companies can outline each corporate foreign exchange exposure and the FX Hedging Products or strategies to be utilised to manage each exposure individually.

This might include the types of FX Hedging Products which will be utilised to manage risks. Such as FX Contracts Contract and FX Options Hedging Products.

In addition, companies can outline how the performance of FX hedging activities will be measured and the implementation methods, such as the use of market orders and automated tools.

Will FX exposures be secured to ensure specific percentage hedge levels are maintained over specific periods of time? Does the company plan to add discretion and variances to allow hedging levels to be maintained within ranges? All of these parameters can be defined to avoid uncertainties, leave no room for misinterpretation and doubts when implementing the policy.

Each of these strategies can be clearly laid out within a companies policy, starting with the most significant and material business risks and then working through all less significant corporate FX exposures.

FX Policy Responsibilities

Foreign Exchange Policy Responsibilities

Responsibilities

A robust FX policy will also outline who within an organisation is authorised to execute hedging activities on behalf of the company. As part of this process, companies can establish the following:

  • Will the company form a Foreign Exchange Hedging committee?
  • Who will be part of the FX hedging committee?
  • How frequently will the committee meet?
  • When and how often will FX exposures and hedge levels be reviewed?
  • Who is responsible for monitoring FX hedge levels and exposures?
  • When do any derivatives get reviewed, and who is responsible for reviewing them?
  • What layers of management approval are required for placing FX hedging contracts?
  • Are additional layers of management approval required above specific amounts and timescales?

Monitoring and controls

FX hedging policies should also outline the operational aspects of the program, for example:

  • When should management be updated regarding FX activities, and what is the chain of responsibility?
  • Who is allowed to carry out trades, and within what limits?
  • How and by whom are trades confirmed?
  • What are the reporting responsibilities?
  • What are the precise steps, and what tools are needed to implement the policy?

Companies can choose to include accounting procedures and standards.  A decision might be made to have two separate policy documents for FX Hedging and Accounting Policy. It is important that both policies are fully aligned.

Foreign Exchange Policy Regulatory Considerations

FX Policy Regulatory Considerations

Companies should consider the regulatory and reporting requirements of FX hedges and ensure the FX Hedging Policy can be altered in future to satisfy regulatory changes.

Throughout the life of the policy, it should remain fit for purpose. Companies can review and revise policies at specific intervals to ensure they remain appropriate. FX Hedging Policies should be communicated across all necessary business functions and stakeholders.

Are you developing a new or existing Corporate FX Hedging Policy?

Reach out today for a no obligation discussion.
We are very happy to help at all stages of your process.