This guide is from our content partner, Ebury
To manage currency risk, companies need to develop hedging strategies to minimise the impact of currency fluctuations on their margins. There are mainly three commonly used hedging strategies that companies deploy:
- Static hedging program
- Rolling hedging program
- Layered hedging program
1. Static hedging program
It is usually associated with a conservative risk profile and a high protection level. Here, you purchase one or multiple forward contracts simultaneously to cover your entire exposure. Upon entering a new period, you purchase a new set of hedges to cover the following period.
2. Rolling hedging program
Here, you hedge a fixed amount to a future date. In this program, you continuously extend hedges with new hedges at a later date for the same tenure, thus ensuring continuous coverage. This helps you maintain a constant hedge ratio, smoothen volatility and achieve more stable and predictable hedging outcomes.
3. Layered hedging program
Hedges are applied in progressive layers, and you do not need to achieve a 100% accurate forecast. Each hedging period has a set hedge ratio. As your hedging period comes to an end, you top up the hedge to meet the predefined hedging ratio set out in the policy. Hedge ratios are usually greater for near dates when predictability is higher and lower for further dates. The longer the tenor of your strategy and the higher the frequency, the more ‘smoothing’ effect on volatility you create.
A quick overview of different hedging program
Good to know
Having covered different hedging programs, your choice of the right strategy for your business is based on many factors – visibility
of future transactions, risk tolerance, exposure assessment, sensitivity analysis of exchange rates and many more.
Also Read
Join our Treasury Community
Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below.