FXTalking Shop

Talking Shop: Who Outside Treasury Reviews Hedging Strategy?

By October 18, 2021October 19th, 2021No Comments

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Member question: “Do other companies review their FX hedge strategy with functions/leadership outside of treasury?

  • “We review FX impact results (underlying + hedge) monthly with the CFO, but we don’t discuss our hedge strategy, which has raised questions on governance.
  • “If you do review your hedge strategy (hedge ratios, currencies, execution approach, instrument usage, etc.) with other functions/leadership outside of treasury, how frequently is that done, with whom, and to the extent you can share, what kind of detail do you go into?
  • “Also, do you need approval outside of treasury to change your hedging approach?”

Peer answer 1: “We review our hedge strategies and update them quarterly at a hedge committee meeting.

  • “The hedge committee includes the CFO, corporate controller, corporate business operations leader and regional/business unit finance leaders.
  • “We also do a deep dive annual FX hedge review with each regional/business unit finance team.”

Peer answer 2: “We are doing the same. We have a finance risk committee meeting on a quarterly basis. For any changes in FX strategy, we get the committee’s approval or review. 

  • “Finance committee members are the leaders of tax, FP&A, accounting, treasury and corporate CFO.
  • “We also review the committee members once in a while to make sure we include the right stakeholders in the meeting.”

Peer answer 3: “We recently put in place a quarterly FX committee meeting reviewing hedge results.

  • “This is in addition to the CFO/board committee report/meeting. The FX committee members are from accounting, FP&A, tax, etc.
  • “We review hedging strategies, but the unofficial goal of the committee is raising FX awareness and getting alignment with teams that may impact your hedge results.”

Anne Friberg, NeuGroup senior director: “In the end, it all comes down to who owns the results of the FX hedge activities and how that is tied to people’s KPIs and incentives. If all the results are held at the corporate level, there is little reason to involve stakeholders outside of treasury in hedge strategy because treasury owns it.

  • “If results are allocated in some way to regions or business units (for example, via back-to-back internal hedges or because treasury hedges on their behalf), then they will feel the pain or gain (either from forecast inaccuracy or hedge decisions, or both) and will want to have a say in how exposures are hedged.
  • “Hedge accounting changes a few years ago also moved the results from other income & expense (‘below the line’) to the line item that’s being hedged, which for many is revenue, which is often very integral to compensation/KPI targets.
  • “If treasury owns the results, its communication with business units is still very important because forecasts that drive the hedge decisions—if inaccurate—can result in over- or under-hedging and undesirable volatility on earnings, for example. Treasury has to educate and create an appreciation for the importance of accuracy to company results overall.”

Justin Jones

Author Justin Jones

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