Risk Management
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Making the Decision to Hedge

by Renato Pestana, Regional Treasury Manager, TNT NV

FX hedging is a fundamental element of every treasurer’s role, with the potential for large swings in financial results if hedging is absent or insufficient. Defining the right hedging policy for the business is essential, taking into account stakeholders’ risk management appetite and objectives. Once the overall approach to FX risk has been established, treasurers can then look at the most appropriate way of achieving this, and how to hedge in practice.

Different forms of hedge

The first challenge as part of an FX policy is to define when, and when not to hedge. There are typically three types of hedging: fair value hedging, which covers translation risk for net monetary assets and liabilities; cash flow hedging, which covers transaction risk on both actual and projected cash flows, and net investment hedging. Of these, the most complex business case for hedging is in the areas of projected cash flow hedging and net investment hedging. According to Citi’s 2010 CitiFX Corporate Risk Management Study, comprising 307 companies, 77% hedge net monetary FX assets and liabilities, 76% hedge forecast exposure while 22% hedge net investment exposure.