Forex Hedging Ratios
Each company will need to develop and review its own forex hedging policy and procedures. Note that
forex hedging percentages or ratios can be refined as the data capture process improves.
A company may choose not to hedge all of its exposure to certain currencies. For example, it may be
prudent to use confidence factors to determine either a hedging ratio or a forecast of foreign cash flow.
It may be a wise decision to reduce the forex hedging ratio if there is questionable data capture, at least
until the data capture process improves. Predicting future cash flows requires significant judgment
skills and considerable estimates of future activity. The forex hedging ratios related to longer-term
future cash flows will often be lower to avoid over-hedging a position.
If management reduces the forex hedging ratio because it has a certain view about future currency
movements, then the company is engaging in speculative behavior (not hedging). Ideally, this activity
should be tracked and reported separately to senior management and the Board of Directors.
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