A CFO's Guide To Building An FX Policy
An FX policy is a documented framework that governs how your business manages currency risk. It takes the guesswork and emotion out of hedging decisions by establishing clear rules, responsibilities, and review processes.
Why Businesses Write One
Without a policy, FX decisions are often made reactively, inconsistently, or by people without the expertise to evaluate the options. This leads to:
A written policy addresses each of these. It doesn't need to be complex: some businesses use a two-page document covering the key decisions.
Key Decisions A Policy Covers
1. Minimum exposure threshold
What's the smallest foreign currency exposure worth hedging? Each business sets its own level, per transaction or per quarter. Below the threshold, the administrative cost of hedging may outweigh the risk.
2. Hedge ratio by confidence level
Some policies set the ratio by how certain the underlying cash flow is. The figures below are an illustration of one policy in use, not a target. The guide on how much businesses cover shows what each share does to the risk:
| Confidence Level | Hedge Ratio |
|---|---|
| Confirmed commitments (signed contracts, invoices received) | 80-100% |
| Probable commitments (expected orders, budget forecasts) | 40-60% |
| Possible commitments (pipeline, speculative) | 0-20% |
3. Approved instruments
Which hedging tools are permitted? Policies commonly list:
4. Maximum hedge horizon
How far into the future can you hedge? This depends on visibility into future cash flows. Example horizons:
5. Review frequency
How often is the hedging position reviewed? Some policies set quarterly, and many businesses review monthly. A review typically covers:
6. Authorisation levels
Who can approve hedging transactions? An illustrative set of thresholds:
7. Counterparty policy
Who are you permitted to transact with? Policies often specify:
Presenting FX Risk To The Board
Boards look for three things: clarity, context, and a proposal from management.
Clarity: Present a simple summary of current FX exposure by currency, amount, and time horizon. Use a table, not a paragraph.
Context: Show what a 5% and 10% adverse rate move would cost in home currency terms. This makes abstract "exchange rate risk" tangible.
Proposal: Management sets out a specific approach with its rationale. A line such as "Management proposes covering 80% of confirmed Q3 EUR exposure via 3-month forwards at 1.1620" gives the board more to decide on than "we could consider hedging." The figures are illustrative.
Template: FX Policy Summary
Here is an illustrative framework a board might adapt with its own advisers. The figures are examples, not targets:
Objective: To protect the company's operating margins from adverse currency movements while maintaining flexibility to benefit from favourable moves where appropriate.
Scope: All foreign currency exposures exceeding £25,000 per quarter.
Approach:
Horizon: Maximum 12 months. Standard hedge tenor: 3-6 months.
Review: Monthly by FD. Quarterly board report.
Authorisation: Transactions up to £100,000: FD. Above £100,000: CFO + FD jointly.
Providers: FCA-regulated specialist FX brokers. Current provider: BLK.FX.
The BLK.FX FX Policy Audit
Not sure where to start? BLK.FX offers a free 30-minute FX strategy audit. We'll review your current exposure, discuss your business needs, and talk through how other businesses structure their policies.
No obligation. No jargon. A plain conversation with FX specialists.
Key takeaway: An FX policy doesn't have to be complicated. A simple, documented framework covering what to hedge, how much, with whom, and when to review can turn the approach to currency risk from reactive to proactive.