In corporate treasury, the conventional wisdom is often to hedge up to 100% of a company’s exposure. This aligns with the most common policies and, on the surface, seems to mitigate risk effectively. But here’s the kicker: some strategies and products allow companies to hedge beyond 100% of their exposure. So why do most organizations stop at 100% when going beyond could make more sense in certain situations?
Let’s think about it. In volatile markets, a 100% hedge may not account for potential over- or under-hedged positions caused by fluctuations in forecast accuracy, timing mismatches, or unforeseen economic changes. Hedging beyond 100% can create a buffer, ensuring the organization stays covered even when the unexpected happens. Yet, this approach remains underutilized.
When Could Hedging Over 100% Make Sense?
- High Volatility Markets: In industries prone to sudden price swings, an additional hedge could serve as insurance against adverse movements that might push exposures beyond initial forecasts.
- Forecast Uncertainty: If cash flow or revenue forecasts are less reliable, hedging beyond 100% could help absorb deviations, reducing the risk of under-hedging.
- Strategic Risk Management: For companies with significant currency or commodity exposure, hedging beyond 100% could be a tactical move to lock in favorable rates, especially during times of economic uncertainty. Flexible hedging products like options, which do not have to be settled or exercised, can make this approach more practical and adaptable.
Why the Reluctance?
Despite these potential benefits, most companies shy away from hedging beyond 100%. Why? Here are a few potential reasons:
- Perceived Conservatism: Hedging over 100% might be seen as speculative rather than protective, creating discomfort for boards and stakeholders.
- Policy Limitations: Many treasury policies are designed with strict limits, making it harder to deviate from the norm.
- Cost Considerations: Extra hedges, particularly using options, come with additional costs that some treasurers may struggle to justify.
The Call for Discussion
Should treasurers challenge the status quo and embrace more strategic and flexible hedging approaches? Is it time to rethink treasury policies to allow for greater flexibility in managing exposures? Or is the perceived risk of over-hedging simply too high?
What do you think?
- Do you agree that hedging beyond 100% could make sense in certain situations? Why or why not?
- Has your organization ever considered this approach, and what were the results?
- What challenges do you foresee in implementing a policy that allows for more flexible hedging strategies?
Let’s start the conversation! Share your thoughts in the comments below.
To kick things off, we’ll be sharing comments from some of our board members—treasury practitioners with deep industry expertise—and insights from our content partners, including leading treasury vendors and technology providers. Stay tuned for their perspectives, and feel free to respond or add your own!
Nicholas Franck, Treasury Masterminds board member comments:
Gains and losses are a product of cash forecast accuracy AND movements in market rates. Most treasuries put significant time and effort into making their cash forecasts accurate, but little to none into making their risk managers experts. “That would be speculation”….
You can’t be forecast what the market rate will be in three year’s time – but you can work for three years forecasting what it will be in one minute, one hour, one day’s time.
Who’s done an analysis to see what improvement in market rate forecasting is needed to justify one or two FTEs?
If not, why not?
Johann Isturiz Acevedo, Treasury Masterminds board member comments:
Cost increase is key element to stop at 100% for market like AMECA when cost of carry is expensive, it has to be well presented to the management to make such a case
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If you are know with certainity your exposures hedging more (or less than 100%) could well be called speculation.
However many companies struggle with understanding with complete accuracy their exposure (current and forecast) and so often will hedge less than 100% as a conservative approach. On that basis, I agree that theoretically there may be an argument for hedging more than 100% but I also understand the general reluctance.
For me, the priority should be in understanding and managing exposures to facilitate accurate hedging. This can be difficult but improvements in technology (including AI) is helping that process.