A client recently told me they are considering hedging their FX exposure.
The discussion was triggered after management started seeing negative impacts from currency movements in their business.
Initially the fluctuations were absorbed. Margins moved slightly, forecasts still looked acceptable, and FX was not a major topic in management meetings.
Over time, however, the impact became more noticeable. Margins were somewhat lower than expected and financial forecasts became less reliable. Eventually the question appeared at the management table:
"Why didn't we hedge this?"
Situations like this are quite common.
The challenge is that there is often a meaningful gap between the intention to hedge FX risk and having a structured risk management framework in place.
In this particular case the company was effectively starting from scratch.
Very quickly a number of practical questions emerged. What exactly is the exposure we want to hedge? Is the concern balance sheet volatility or future cash flows? What proportion of the exposure should be covered? Over what time horizon? Which instruments should be used and who should ultimately make the decision?
These are not easy questions to answer when currency markets are already moving and management is expecting a quick solution.
FX volatility itself does not create the exposure. It simply makes the exposure visible.
By the time the business impact becomes noticeable, the underlying currency risk has often been present for quite some time.
The most effective FX risk management frameworks are therefore usually developed before that moment. When markets are relatively calm, companies have the space to define what exposure they want to manage, what level of volatility they are comfortable with, and how hedging decisions should be executed.
This way the response to currency movements follows a predefined framework rather than a reaction to the latest market move.
Curious how others are experiencing this at the moment.
Are recent FX movements making you pay more attention to currency risk, or does your risk management framework already allow you to be less reactive?
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Alexander Ilkun
clearBox - Treasury Services
Latvia
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