Hedge Ratio
The share of a foreign currency exposure that is covered by a hedge. A business with a €1m exposure and €700,000 of forward cover has a hedge ratio of 70%. Ratios are usually higher for confirmed payments than for forecasts.
Related terms
Hedging
Taking an offsetting position to reduce the impact of currency or price movements on a business. The aim is to protect margins and make cash flows more predictable, not to speculate.
Read full definitionHedging Policy
A short written document that sets out what a business hedges, how much, with which instruments, and who approves each trade. It keeps hedging decisions consistent when markets become volatile.
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The degree to which a business’s financial results are affected by exchange-rate movements. It arises from foreign-currency sales, purchases, assets, liabilities or forecast cash flows.
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Forward Points
The amount added to or subtracted from the spot rate to price a forward contract. They reflect the interest-rate difference between the two currencies over the contract period.
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A hedging strategy that combines buying a protective option and selling another to offset the cost. It caps downside risk within a defined range while keeping some upside, often at little or no premium.
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Reducing currency risk by matching revenues and costs in the same currency, so gains and losses offset without a financial instrument, for example, paying suppliers in the currency you also earn.
Read full definitionMark-to-Market
Revaluing an open position at the current market rate to show its present gain or loss. Hedges are marked to market so a business can see the live value of its contracts.
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A request for additional funds when an open hedging position moves against you and its mark-to-market loss exceeds the collateral already posted. It restores the required security buffer.
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The risk that an exchange rate moves between agreeing a foreign currency payment or receipt and settling it. It is the most direct form of FX exposure, for example an unpaid supplier invoice in dollars.
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