Benchmark hedge ratio

A company may have foreign exchange exposure, such as a current obligation to pay a supplier in a foreign currency in 90 days (a booked exposure) or a projected future obligation that is expected to arise in six months (a forecasted exposure).

The treasurer should decide what proportion of this exposure to hedge, such as 100% of the booked exposure and 50% of the forecasted exposure. This gradually declining benchmark hedge ratio for forecasted periods is justifiable on the assumption that the level of forecast accuracy declines over time, so the treasurer should at least hedge against the minimum amount of exposure that is likely to occur.

A high-confidence currency forecast with little expected volatility should be matched with a higher benchmark hedge ratio, while a questionable forecast may justify a much lower ratio.

Related Courses

Accounting for Derivatives and Hedges 
Corporate Cash Management 
Treasurer's Guidebook