There is no single right percentage. Cover is a ratio between 0% and 100%: how much of an exposure is fixed with a forward and how much is left open. Each step along that line takes away a straight-line share of the risk.
What each ratio does
Take a US$1,000,000 payment with a budget rate of 1.30 for GBP/USD. At that rate it costs £769,231. Suppose a 5% adverse move is the scenario being tested, which on the full amount is about £38,462.
| Share covered | Share open | Cost of the 5% move on the open part |
|---|---|---|
| 0% | 100% | About £38,462 |
| 30% | 70% | About £26,923 |
| 50% | 50% | About £19,231 |
| 80% | 20% | About £7,692 |
| 100% | 0% | £0 |
The same ratio also covers the favourable side. At 50% covered, half of a gain from a better rate is given up.
What finance teams weigh
How sure the cash flow is. A signed purchase order with a fixed date is firmer than a forecast. Many policies cover more of the firm amounts than the forecast ones.
How much a bad outcome costs. If the 5% move above would take a thin margin to zero, the open part matters more than if the margin is wide.
How long until the money moves. Longer horizons carry larger typical moves, and also more doubt about the amount.
Governance. Boards and lenders often want a written policy that sets ratios by confidence level. The app lets you save a policy with a target band and shows where you stand against it.
Patterns in use
Some businesses cover more of the next quarter's confirmed payments, less of the quarter after, and leave anything beyond six months open. Others move the ratio up as the date approaches. These describe policies in use, not advice for any business. Which mix fits a given business is a conversation with a specialist.
Common questions
Does blending reduce the average cost? Not on its own. It narrows the range of outcomes. Past rate moves do not predict the next twelve months.
Where can I try ratios on my own numbers? The "Blend your position" slider in the free calculator and on the Plan page shows the effect of any ratio on your figures.