Hedging 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.
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 definitionHedge 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.
Read full definitionHedge Accounting
An accounting treatment, set by standards such as IFRS 9, that lets a business record the gains and losses on a hedge in the same period as the exposure it hedges. It reduces profit-and-loss swings caused by timing differences, but only if strict documentation and testing rules are met.
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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.
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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.
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.
Read full definitionMargin Call
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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