Foreign Exchange Risk Management
Currency volatility can wipe out profit margins overnight — hedge FX exposure systematically, not reactively
- Foreign Exchange Risk Management
- Forward Contracts vs Options
- Building an FX Hedging Policy
Foreign Exchange Risk Management#
A 10% currency move on a 10% margin product eliminates all profit. FX hedging is not speculation — it's protecting known cash flows. Natural hedges (matching revenue and cost currencies) are free. Financial hedges (forwards, options) cost 0.5-2% of transaction value. Rule: hedge 50-80% of forecast exposure for 6-12 months forward. Leave 20-50% unhedged to benefit from favorable moves.
Forward Contracts vs Options#
Forwards: lock in an exchange rate for a future date. Zero upfront cost but you're locked in — can't benefit from favorable moves. Best for: known, committed cash flows. Options: pay a premium (1-3% of notional) for the right but not obligation to exchange at a set rate. Benefit from favorable moves, protected against unfavorable. Best for: uncertain cash flows (bid proposals, forecasts).
Document: what exposure to hedge (committed vs forecast), hedge ratio (50-80%), instruments allowed (forwards, options, no speculation), hedge tenor (6-12 months), and authorized signatories.
Building an FX Hedging Policy#
Document: what exposure to hedge (committed vs forecast), hedge ratio (50-80%), instruments allowed (forwards, options, no speculation), hedge tenor (6-12 months), and authorized signatories. Review policy annually. Without a policy, FX management becomes reactive — you hedge when scared and don't hedge when comfortable, which is backwards.
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- Currency volatility can wipe out profit margins overnight — hedge FX exposure systematically, not reactively
People also ask
What is the business impact of foreign exchange risk management?
Currency volatility can wipe out profit margins overnight — hedge FX exposure systematically, not reactively
How can I prepare my business?
Start with visibility into your current exposure, benchmark against industry peers, and build a 90-day action plan targeting the highest-impact improvements first.
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