Why a written policy
As currency exposure grows, decisions made case by case become hard to explain and harder to defend. Timing, individual preference and the latest market move start to drive outcomes. A written policy fixes the objectives, the limits and the authorities in advance, so each decision is made against the same standard and can be reviewed later on that basis.
Businesses usually formalize a policy when currency exposure becomes material to margins or results, when hedging becomes regular, or when a board, lender or auditor asks how the exposure is managed.
What a policy contains
| Component | What the policy sets out |
|---|---|
| Exposure identification | Which exposures are in scope (transaction, forecast, balance sheet), how they are measured, and who provides the forecasts |
| Eligible currencies | The currencies that may be hedged, and any that are excluded because the exposure is immaterial or the market is illiquid |
| Hedge objectives | What hedging is for: protecting budget rates, margins or cash flows. Not producing trading gains |
| Permitted instruments | The instruments allowed, any that need separate approval, and any that are not permitted, such as structures that can produce outcomes worse than a forward |
| Coverage ranges | Minimum and maximum hedge ratios for each category of exposure and each time horizon |
| Maximum tenors | How far ahead hedges may be placed, overall and by instrument |
| Counterparties | Approved providers, how they are selected and reviewed, and any limits on concentration |
| Credit and liquidity | Use of credit facilities, possible margin or collateral calls, and funding for settlements |
| Authorization | Who may arrange, approve and confirm hedges, amount limits, and separation between those roles |
| Reporting and oversight | What is reported, how often, and to whom: coverage against the ranges, valuations, results against budget |
| Exceptions | How breaches are identified, approved, recorded and corrected |
| Review | How often the policy is reviewed, and what changes trigger an earlier review |
An illustrative framework
Most policies treat exposures differently according to how certain they are. A signed contract can be hedged in full with confidence. A forecast twelve months out may not happen at all, or may be smaller. Coverage ranges usually fall as certainty falls, so hedges are added as forecasts firm up.
| Exposure category | Example | Coverage range | Instruments |
|---|---|---|---|
| Committed | Signed contracts, issued invoices and purchase orders | 75% to 100% | Forwards; options |
| Forecast, 0 to 6 months | Recurring sales or purchases with a stable history | 50% to 75% | Forwards; options |
| Forecast, 6 to 12 months | Budgeted flows with more uncertainty in amount or timing | 25% to 50% | Options, and forwards for part of the range |
| Forecast, 12 to 24 months | Longer range plans | 0% to 25% | By separate approval only |
Illustrative only. The categories, ranges and instruments are examples of how a policy can be structured, not recommendations. Each business sets its own, according to its margins, forecast reliability, liquidity and risk appetite.
Ranges rather than single ratios leave room for judgment. Within a 50% to 75% range, treasury can hedge more when rates are close to budget and forecasts are firm, and less when the outlook for the business is uncertain, while staying inside limits the board has approved.
Authority and controls
A policy defines who can act and who checks. Typical controls include approval levels by amount, limits for each person who may arrange hedges, a rule that no one approves their own request, confirmations sent to someone other than the person who traded, and regular reconciliation of hedges against exposure. These controls protect the business and the people in it.
Handling exceptions
Exceptions happen, often for good reasons. A forecast falls and coverage rises above the maximum, or an opportunity justifies a hedge beyond the usual tenor. The policy should say who may approve an exception, how it is recorded, and how quickly it must be corrected or ratified. A documented exception is a decision; an undocumented one is a control failure.
Consistency without removing judgment
A policy does not make decisions by itself, and it should not try to. It removes the questions that should not be reopened every time, such as what hedging is for, which instruments are allowed and who approves, so that judgment is spent on the questions that matter: how firm the forecast is, how much of the range to use, and which permitted instrument fits the exposure.
Keeping the policy current
Review the policy at least annually, and earlier when the business changes: a new market, a new currency, an acquisition, a change in margins or financing. A policy written for last year's exposure will not fit this year's.
Policy in Vantry ATI
In Vantry ATI, hedge layers carry the targets a policy sets for each period, HedgeCore compares the structures a business permits on the same assumptions, and coverage against target is reported by layer. Approval levels, user limits and confirmation recipients can be set to match the authorities in the policy.
This article is general information about managing currency risk. It is not investment advice or a recommendation to use any instrument, and examples use illustrative rates and amounts, not quotations. Products are offered in Canada by Vantry Capital Inc., subject to eligibility and credit approval.