The world of treasury is changing in more ways than one. Whilst Palm is breaking norms and giving treasurers access to out-of-the-box cash forecasts in days, others are tackling the age-old problem of foreign exchange hedging.
Every treasurer understands that effective risk management can be as psychologically difficult to execute as it is operationally. Therefore, an effective strategy acknowledges both of these challenges.
The array of hedging strategies available is ever-growing, however we know, it is the traditional methods that are most frequently utilised. However, when considering cash flow hedging, the additional ambiguity and reliance on the cash flow forecast means these traditional strategies come with complexities that require constant vigilance and adaptation. When operating in a large corporation with minimal flexibility in policy, this can be difficult to navigate. In this blog post, we’ll evaluate the traditional with the evolutionary, by introducing two innovative companies—Bound.co and Hedgeflows—who are changing how businesses approach FX hedging.
Traditional FX Hedging
When hedging cash flows, treasurers commonly follow a structured approach that involves identifying exposure, selecting a strategy, and reporting on its effectiveness. There is an element of rigidness in this approach, that although comforting, is far from optimal.
This involves:
Hedge Ratios Based on Forecasted Cash Flows Treasurers typically identify a hedge ratio—what percentage of the expected foreign currency exposure they want to protect. This ambiguous process signifies how willing the treasurer and the business are to rely on the cash flow forecast. Under-hedging leaves unprotected exposures, and over-hedging means taking on more FX risk than the business already has.
Choosing a Strategy: Rolling, Layered, or Others The chosen hedging strategy has likely been decided upon and has been consistent for a long time. There is an inherent risk to the treasurer for changing this strategy and their accountability if there is a negative outcome for the business.
Each strategy comes with its own set of trade-offs—rolling hedges provide flexibility but may expose treasurers to unfavourable market timing, while layered strategies offer protection over a more extended period but require more complex management.
Fixed Strategy and Ongoing Reporting Once a strategy is chosen, companies typically lock it in and report on performance monthly. This involves careful monitoring of the market, regular adjustment of positions, and transparent reporting to stakeholders. For example, a blend of products is often used, such as spot contracts, forwards, and options, with some budget allocated to premiums for extra protection. With some more complex structures involving leverage, knock ins/ outs for the more adventurous treasurers. The success of each of these different products can be quantified, however how much time is dedicated to doing so, and is the data to do so readily available?
Trigger Risk: When to Book a Trade Timing the market is one of the most significant challenges treasurers face. Trying to time FX trades to capitalise on currency movements can backfire, especially when news-driven volatility creates knee-jerk reactions. The result? Businesses may end up booking trades at some of the worst possible times.
Changing Cash Flow Forecasts Cash forecasts often shift throughout the year due to market conditions, sales fluctuations, or unexpected events. However, adjusting the hedging strategy to accommodate these changes is challenging—especially if long-term hedges are already in place and doing so will crystallise FX losses.
New Approaches to FX Hedging: Bound.co and Hedgeflows
In recent years, innovative companies like Bound.co and Hedgeflows have emerged with fresh approaches to FX hedging. While both companies tackle the same core issue, they offer treasurers different ways to manage their foreign exchange risk more effectively.
Bound.co is rethinking FX hedging by providing businesses with a simple, automated, and data-driven approach with their multiple, flexible programmes. The company’s platform is designed to take the guesswork out of hedging by offering smart tools that optimise FX management. Bound allows treasurers to automate their hedging processes, eliminating the need to time the market manually. By using Bound, companies can reduce trigger risk and avoid emotional reactions to market movements leading to excessive trading, all while gaining access to easy-to-use dashboards and reporting features that help treasurers stay on top of their FX positions.
For more information, visit their website at Bound.co.
Hedgeflows Hedgeflows, on the other hand, focuses on empowering businesses with advanced analytics and scenario planning to build a hedge strategy. The platform helps treasurers model potential market movements and adjust their strategies in real time. Hedgeflows is designed to address the challenge of changing cash flow forecasts by providing tools that dynamically adapt hedges based on updated projections. This means companies can remain flexible throughout the year, even as their cash flow outlook evolves.
Learn more about their services at Hedgeflows.com.
Conclusion: A New Era of FX Hedging for Treasurers
The landscape of FX hedging is evolving rapidly and we no longer have to continue with our set it and see approaches to FX hedging. While traditional strategies like rolling and layered hedging remain foundational for managing risk, new technologies and platforms—like those offered by Bound.co and Hedgeflows—are providing treasurers with fresh tools to navigate the complexities of foreign exchange risk.
These companies are breaking the mould by offering simplified, flexible, and data-informed solutions that help businesses avoid common pitfalls.
