This question is frequently asked by finance leaders responsible for protecting revenues and profits against adverse fluctuations in foreign currency exchange rates.

Broadly speaking, the goal of an FX hedging strategy should be to ensure that a company has protection in the event that currency markets move against them. When assessing whether a company has implemented “the best” FX hedging strategy, some factors worth considering include: 

  • Is the performance measurable?
    • Can the FX hedging strategy be effectively measured against key performance indicators (KPIs)? These could include the level of risk reduction achieved, expected liquidity impact from margin requirements and the cost of currency hedging.
    • The best FX hedging strategies can demonstrate effectiveness against predetermined KPIs.
  • Does it balance hedging policy objectives and constraints?
    • When undertaking FX hedging a company has the ability to set multiple parameters including hedge tenor, hedge ratio and the derivative instrument used.
    • There is no perfect combination that will work for every company. The best FX hedging strategy should optimize the expected outcome based on each company’s individual circumstance. Predetermined and measurable KPIs include risk reduction and the cost of currency hedging which can be measured using online tools.
  • Is it repeatable? 
    • A strategic hedging policy and process should be defined to create a framework that can deliver consistent results for a fair cost, regardless of future currency market moves
    • Whilst a hedging strategy can include some element of opportunism and take tactical input based on market conditions, this should be done within a consistent, repeatable framework.  
    • Implementing speculative hedging activity based on daily newsflow or sharp market moves is just that, pure speculation. 
  • Does it incur additional risk?
    • Treasurers and finance teams should ensure risks are not being repackaged to appear elsewhere further down the line.  
    • There are plenty of examples where derivative solutions have been implemented that result in a client incurring significant unexpected losses.  
    • Remember that if a specific product seems too good to be true, it probably is! 

In our experience no-one can consistently and reliably predict the future direction of currency markets. FX hedge funds and other aggressive trading firms like Goldman Sachs often lose large sums of money attempting to profit from this type of speculative activity. It comes as no surprise, therefore, that predictions from FX analysts at Banks and brokerage firms often turn out to be incorrect. As a Corporate Treasurer or CFO, why take the risk of making a speculative decision on the timing of your hedges when the cost and risks of doing so are so high?

At Hedge Eagle we are here to provide help with any questions related to the cost of hedging, risk measurement or indeed, hedging strategy. Measurable and repeatable reduction of risk in return for a fair hedging cost will benefit all stakeholders and increase the chances of success.

Our cloud based hedging tools help CFOs, Treasurers and Finance leaders to control cost and manage the risk of currency hedging trades. It’s often hard to know if you are being charged fairly for FX hedging but our platform enables you to have confidence that you are paying a fair cost for currency hedging.

Please check out our website to sign up for a free trial account today and receive insight into exactly how much you have paid your bank or broker to implement your hedging strategy.