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Member question: “For Neugroup members with an FX cash flow hedging program, what is your hedge horizon?
- “For context, we hedge up to two years and we’re looking to revise that horizon (potentially up to three years) in our FX policy.
- “Last, what determines your hedge horizon (e.g., budget cycle, product development cycle, contracts, other)?”
Peer answer 1: “We manageour cash flow hedging program on a rolling 12-month basis until we set initial business plan rates for the next calendar year; we can extend to 15 months to cover the next full calendar year at that time.
- “Outside of this normal duration, we can request CFO approval to hedge up to five years out for a portion of our long-term hedge exposure when there is a strong business case.”
Peer answer 2: “We hedge out to two years only, governed by the hedging policy. The policy allows us to hedge longer if the CFO approves. Our forecast goes out to three years, but we feel more comfortable with the accuracy of the forecast for nearer terms.”
Peer answer 3: “We hedge up to 13 months. Our focus is to build certainty in our operating plan for next year. So, in our operating plan, FX rates are mostly fixed.
- “I would be very interested in hearing your rationale for revising the hedge horizon.”
Peer answer 4: “We employ a rolling cash flow hedge program with hedges not extending beyond rolling 13 months. For the majority of the cash flow hedge program participating currencies, we use average achieved FX rates to establish budget FX rates.
- “I would be interested to learn what analysis method used by others in building recommendation to hedge specific currencies.”
Peer answer 5: “We hedge operating expense (opex) cash flows to lock our plan FX rates for the coming year. We hedge 12 months of opex and, since the plan rates are established two months before the end of the year, we trade forwards with tenors up to 14 months.”
- Peer response: ”Just curious, do you hedge up to 100% and do you use the hedge rate as the budget rate?”
- Peer answer: “We hedge 70% of the opex under our cash flow hedge program. This is to keep a margin of safety to avoid being over-hedged. We do not use the hedge rate as the budget FX rates, although we proposed this methodology to establish the plan rates, to have no slippage.
- “For most currencies, including all the cash flow hedge currencies, our budget rates are equal to the accounting month-end rates established at the end of the previous fiscal month (usually we open our hedges less than a week after those rates are established to minimize the slippage).”
