A comprehensive guide to different hedging programs
By 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
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.
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.
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.
How to Boost your Revenue and Protect Margins with Treasury Solutions
In the live session with Ebury, the panelists explored the impact of treasury solutions on business operations, emphasizing adaptability to market changes and the use of innovative financial tools. They discussed how trade finance instruments help mitigate risks in international transactions, the importance of understanding interest rate fluctuations, and alternative funding options like factoring and receivables securitization.
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