The Complete Checklist for a Successful Currency Risk Management Strategy

Achieving a successful outcome in any endeavour does not come about by chance.

It requires planning, forethought, discipline and usually starts out with a checklist from which to build.

We consider the following questions to be the foundation to achieve a successful currency risk management strategy for any business.

Step One: Determine the Objectives:

  1. What is your overarching objective?
    1. Maximise operating margins and profit levels
    2. Maximise shareholder value
    3. Both
  2. Do you operate in a highly competitive industry?
  3. Is it important to maintain and improve your market share?
  4. Can you pass on increases in prices if the exchange rate moves significantly?

Step Two: Articulate your Strategy:

  1. What is your budget period?
  2. Are you able to provide accurate cashflow projections over your budget period?
  3. What is your benchmark rate and how often is it / will it be reviewed?
  4. What is the maximum hedging maturity horizon – does it match your budget period or not?
  5. What type of hedging products will be considered appropriate: FECS and FX options?
  6. If FX Options are included, are there any restrictions on the type that can be used?
  7. Will leverage be permitted? If so, what is the maximum leverage factor?
  8. What size will each transaction be and will they all be the same?
  9. How often will transactions be placed: weekly, monthly or when the portfolio falls to a certain percentage?
  10. Will orders be left or will the deals be done at the current market rate?
  11. How many counterparties should you consider and how will you select them?
  12. How will you determine whether each counterparty is creditworthy?
  13. If there is a counterparty panel, how will the transactions be allocated?
  14. Will margin counterparties be allowed? If so, how will you manage the risk of a margin call?
  15. Who is responsible for determining the risk management strategy?
  16. Who is authorised to implement the risk management strategy?
  17. What procedures will be put in place to confirm any hedging transactions?
  18. Who is responsible for confirming that each transaction is correct?
  19. How and where will the hedging transactions be recorded?
  20. What will the hedging transactions be measured against: the benchmark rate and / or the spot rate?
  21. How regularly will the hedging approach be reviewed?
  22. How regularly will your position be reconciled against each counterparty?
  23. How much hedging will be undertaken?  (eg. Will you set a percentage, say, equal to 50% of the total exposure, or do you prefer a range such as between 40 and 60%).

Step Two: Articulate your Strategy:

  1. Who is responsible for maintaining the beneficiary details?
  2. Who is authorised to confirm beneficiary details with each counterparty?
  3. What is the payment process?
  4. Who is authorised to make payments?
  5. If you have a counterparty panel, how will the payments be allocated

Step Four: Who needs to Know

  1. Is reporting to senior management required?
  2. If yes, how regularly will this be undertaken and in what format?
  3. Who is responsible for preparing the reports?
  4. Will reports be required for external parties? How often?

Step Five: Draft the Policy

Once you have the answers to these questions, this will provide the skeleton of a policy framework.  It should be comprehensive enough that someone unfamiliar with your business activities could easily follow the steps.

But it should also be robust enough that no single person is capable of transacting on the company’s behalf without appropriate checks and balances.  This is generally achieved by ensuring that your counterparties have copies of your framework and they are aware of the authority holders.

With the policy now in hand, it’s time to test whether everything has been addressed and implement a hedge transaction.

As you go through the steps, it will become clear whether modifications are required to the process. It’s also worth considering whether you will be able to follow the process in difficult market conditions.  And these occur much more frequently than you think.

Perhaps the most difficult conditions occur when the hedge book is at rates much worse than the current spot rate and you wish you didn’t have them at all.  But remember, the worst time to change any plan is when there is emotional response. So, this brings us to the final step:

Step Six: Have a Sounding Board

Whether it’s a decision-making model, such as the de Bono Six Thinking Hats, a trusted advisor or member of staff, if you’re tempted to disregard your policy consider why you initially developed the framework.


Now we’ve got your head in the risk management game, lets talk about your business

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