FX Hedging Policy
How to write a formal FX hedging policy
A short, board-approved document that tells your finance team how much currency risk to cover, who may deal, and what to do when a limit breaks.
Without one, hedging becomes a run of ad hoc calls. A controller covers the whole exposure one quarter and nothing the next, and the next move lands on whatever was left open.
On £500,000 of open exposure, a 3% move is about £15,000, decided by timing rather than by any commercial judgement. A written policy is what removes that guesswork from the live-quote moment.
This page shows you how to write each clause, and gives you a one-page template to take to your board. Currency Expert compares business FX providers and introduces you to them. We do not execute transfers or hold client funds.
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What the policy exists to defend, and what its scope must exclude
Before you write a single limit, state what the policy is for. Every later clause exists to serve it.
A hedging policy exists to defend a protected rate. That is the budgeted FX rate baked into the pricing of the deal, the rate at which you calculated the import margin, the property return or the payroll cost.
Currency exposure belongs in the decision when the transaction is priced, not when the payment falls due. The band, the instruments and the dealing mandate all exist to keep the business close to that protected rate.
So name where the rate comes from and when it resets. A protected rate nobody owns or dates quietly drifts. It should be set at each budget or pricing cycle by a named owner, usually the finance director, recorded with the date it was struck.
It must not be silently re-based mid-year to flatter a position that has moved against the business. A protected rate quietly moved to match the market is no longer defending anything. The whole policy is the document that removes judgement from the live-quote moment.
The scope clause is a decision to exclude, not a lecture on exposure types
Identifying and sizing your exposures is a separate job, covered in our guide to measuring and managing FX risk. The scope clause only decides which of them the policy governs.
For most SMEs we would write a scope clause that governs transaction exposure alone, the committed supplier payments and the order book, and rules translation and economic exposure explicitly out. A policy that silently implies it covers all three creates a mandate nobody can meet.
Run hedging without that rule and the cost shows up in the pattern. Hedge everything one quarter and nothing the next, and a 3% move lands on whatever was open. On £300,000 that is roughly £9,000, and it repeats.
Writing the hedge-ratio band into the policy
The hedge ratio is a number the board commits to in writing. Written down, it becomes a mandate the dealer must stay inside.
The band is how much of the exposure you insist on locking near the protected rate. It sets a minimum and a maximum coverage. Hedging above the cap or below the floor is a policy breach, escalated under the exceptions clause, not a judgement call the dealer makes alone.
A flat 60% default is a reasonable place for a first policy to start, and it is worth justifying rather than asserting. You hedge the confident core of the rolling forecast, and leave headroom for forecast error and for orders that never actually materialise.
Over-hedging is not the safe option. It forces the business to buy currency it does not need. Why the ratio tapers as the horizon lengthens, and how layering and rolling hedges work, is covered in our guide to FX hedging strategies.
| Clause | Policy setting | On £1m of forecast annual exposure |
|---|---|---|
| Minimum coverage (floor) | 55% | £550,000 hedged |
| Target coverage | 60% | £600,000 hedged |
| Maximum coverage (cap) | 65% | £650,000 hedged |
| Outside the band | breach | escalate under the exceptions clause |
Approved instruments and tenor limits
Treat these as policy line-items, not a tutorial on how forwards work. How each instrument behaves lives on the currency hedging guide.
- ◆FX spot for an immediate need, settling shortly after you deal.
- ◆Fixed forward to lock a rate to a future value date.
- ◆Window or flexible forward to draw down in tranches across a date window.
- ◆Vanilla option for a premium, where the right without the obligation is worth paying for.
- ◆Prohibited by name: leveraged, structured or speculative derivatives, so the prohibition is enforceable.
Two operational points earn their place here. First, the window forward is the clause that quietly matters when the payment date is uncertain, a supplier ship date or a completion that can slip.
A fixed-date forward that lands early forces an awkward roll. We would permit the window instrument for exactly those exposures, rather than treat all forwards as one line.
Second, the trap in approving vanilla options. An options clause that does not name who approves and funds the premium is where these clauses go wrong. The premium is real cash out on day one, and an unbudgeted premium quietly breaches the spirit of the protected-rate objective.
Set the tenor cap at 12 to 24 months, matched to how far you can forecast cash flow reliably. The tenor limit exists to stop the business hedging currency against a forecast it cannot actually stand behind.
Who can deal, who checks, and what happens when a limit breaks
This is the part providers underplay and siblings do not own. The mechanics of the deposit and the margin call sit on the hedging guide; here the policy decides who acts on them.
Delegation of authority and dealing mandates
A dealing mandate pre-sets who may transact, up to what size, and in which instruments. It lets a named person deal without a fresh sign-off each time, and stops anyone dealing outside their authority.
We would write the limit in pounds, not as a vague seniority. A number the dealer can check against a live ticket is enforceable; a job title is not.
Segregation of duties, and the compensating control when one person does everything
The principle is that dealing, confirmation or settlement, and reporting are separated so no one person can both execute a trade and conceal it. That is the four-eyes rule, and it is the right target.
In a three-person finance team, full separation is often impossible. Rather than pretend, we would name the compensating control that keeps the clause enforceable.
That is a monthly director or board review of the dealing blotter, plus an independent bank-confirmation cross-check. With one finance person, you can then actually comply.
Breaches, exceptions and escalation to the board
A formal policy must govern what happens when a limit is broken, not just define it. Name who may approve a deviation, the finance director within a stated band and the board above it, how a breach is logged, and the rule that every breach is reported to the board at the next review.
This is what separates a real treasury policy from a wish-list. A document that defines limits but never says what to do when one breaks tells the dealer nothing on the day it matters.
Counterparty credit limits and where the funds sit
Cap your exposure to any one provider with a stated pounds ceiling, for example no more than £750,000 of live hedging notional with a single counterparty. Add a concentration limit so no single provider holds more than about half, roughly 50%, of your total live hedging volume.
Record where each counterparty holds your money. An FSCS-covered bank protects eligible deposits up to £120,000 per firm since 1 December 2025. An FCA-safeguarded e-money or payment institution, which most brokers are, has no cap, and no guaranteed full return either.
Safeguarded money comes back through a liquidator, the process runs into months, and costs are deducted from the pooled client funds. Failed firms returned about 65% of client money on average between 2018 and 2023.
The clause records which protection applies to each name, so you are not guessing after a failure. We would ask every counterparty where your money sits, and write the answer down.
Pre-authorising a margin call before it arrives
A booked forward can call for more cash if the market moves against it. The clause pre-authorises who may meet that call, and from which named liquidity line, inside the roughly one business day you have before the broker can close the position and crystallise the loss.
Decide this in the calm of policy-writing, not in the hour the call lands. A call you cannot fund in time turns a working hedge into a realised loss.
Hedge accounting: the choice the policy has to make
A policy that ignores designation reads naive to a finance director. No sibling page owns this, so the policy has to.
The policy must state whether the company will seek hedge accounting under FRS 102 section 12 or IFRS 9. A forward that is not designated and documented at inception can drop mark-to-market swings straight into the profit and loss account, creating earnings volatility the board never intended.
The operational detail that catches people is timing. The designation and effectiveness documentation must exist at the point of dealing, not be reconstructed later. A trade documented even a day late cannot be retro-designated, and is disqualified from hedge accounting for its whole life.
That is exactly how a company gets caught at year-end, having assumed the treatment applied. Pair the inception discipline with the ongoing effectiveness-testing burden, which is the honest reason many SMEs decline.
Many businesses will reasonably choose not to seek hedge accounting, and we think that is a defensible answer. But the policy still has to make the choice explicitly, rather than leave the finance team to discover the volatility when the accounts are drawn up.
A worked example: the policy applied to a $2m importer
The clauses in use, with real pounds. Certainty removes upside and has cash consequences, and here they land the way that surprises people.
Worked example
The policy sets a flat 60% band and six-month forwards. The importer buys $1.2m forward at the protected rate, fixing about £938,000 of cost, and leaves $800,000 open. The 5% to 10% initial margin ties up £47,000 to £94,000 until settlement.
Then sterling rises about 3%. On the goods the importer is fine, because the locked rate is doing its job and the open $800,000 has become roughly £18,000 cheaper. But the forward is now out of the money against the market.
The broker’s exposure to the client has risen, so a variation call of about £27,000 lands, due within a business day. Fixing the rate cost nothing on the goods, yet it tied up real cash when the market moved the other way. The mandate and margin clause say who signs the top-up, and from which line.
Mid-quarter a new $500,000 order would push coverage above the 65% cap. The dealer cannot act alone. The finance director approves a one-off deviation inside the stated band, logs it in the dealing blotter, and reports it to the board at the next review.
A larger treasury would taper the band across the year rather than run a flat 60%, which is where the strategies guide picks up. The point here is the machinery: the mandate, the margin clause and the exceptions route all doing their job on the same trade.
The one-page policy template, with review built in
Each row is a short worked default you can accept or change. Start with the document-control header so it functions as a real board paper.
- ◆Policy owner. Named individual, usually the finance director.
- ◆Version. A version number, incremented on every change.
- ◆Effective date. When this version takes effect.
- ◆Next review date. When it is due to be reconsidered.
- ◆Board approval date. When the board signed this version off.
| Clause | Worked default you can accept or change |
|---|---|
| Objective and scope | Defend the budgeted FX rate on committed transaction exposure. Translation and economic exposure are explicitly excluded. |
| Protected rate | Set by the finance director at each budget or pricing cycle, recorded with the date struck, and not re-based mid-year. |
| Exposures covered | Committed supplier payments and the confirmed order book, sized in pounds through the risk-management process. |
| Hedge-ratio band | Cover 60% of forecast exposure, with a 55% floor and a 65% cap. |
| Approved instruments | FX spot, fixed forward, window forward and vanilla options. Leveraged and structured products prohibited. |
| Tenor limit | No hedge beyond 18 months, and never past the point the cash-flow forecast is reliable. |
| Authorisation and dealing mandate | The finance director may deal to £250,000 per trade in approved instruments; above that, two signatures. |
| Segregation of duties | Dealing, confirmation and reporting kept separate; in a small team, monthly board review of the blotter instead. |
| Breaches and escalation | The finance director may approve a deviation within a stated band; larger breaches go to the board; every breach is logged and reported. |
| Counterparty credit limits | No more than £750,000 of live notional with one counterparty, and no more than about 50% of total hedging with any single provider. Record where each holds funds. |
| Hedge accounting | Not sought. If sought, designation and effectiveness documentation completed per trade at the point of dealing. |
| Reporting and review | Monthly management information; board re-approves the policy at least annually and whenever risk appetite shifts. |
Build the review clause into the same document. Your management information should show open exposures, the hedge ratio achieved against policy, the mark-to-market on live forwards, and any change in the forecast. A monthly forecast review is common.
The board should re-approve the policy at least once a year, and whenever risk appetite shifts. A policy nobody reviews quietly drifts out of line with the actual book. Treat this one-pager as the draft you take to the board, not the finished article.
Our view, and what to do next
The band, the instruments and the tenor cap are decisions you make once and write down. The view spends its words elsewhere.
Our view is that a short, maintainable policy your finance team actually follows beats an over-engineered institutional structure nobody keeps current. Length is not rigour. A one-pager that gets read on the day of a margin call does more than a manual that sits in a drawer.
Two clauses are the ones you cannot skip. The first is margin-call authorisation, because a call you cannot meet inside a business day is how a hedge turns into a crystallised loss. The second is a workable breach and escalation route, because limits without an escalation rule are only a wish-list.
Then take the one-page draft to the board for sign-off. When you compare providers that support a hedging programme, forwards, dealing mandates and a credit line rather than spot alone, ask each in writing for four things.
- ◆the initial deposit percentage they require
- ◆the margin-call trigger, and how quickly you must meet a call
- ◆the close-out terms if you cannot meet one
- ◆where they hold client money, and under what protection
Those answers are not admin
They feed straight into your counterparty and margin clauses. We compare those providers and introduce you; you deal with them directly. Currency Expert is a comparison and introduction service. We do not execute transfers or hold client funds.
Common questions
Does a small business really need a written FX hedging policy? +
If you hedge at all, yes. A written policy is what stops hedging becoming a run of ad hoc calls that cover everything one quarter and nothing the next. It does not need to be long. One page that your team follows is worth more than a manual nobody opens.
Who has to approve the policy? +
The board, or the directors if there is no formal board. The point of a treasury policy is that the people accountable for the risk sign off the mandate, so the finance team is executing a decision the business has already taken rather than making it trade by trade.
Who sets the protected rate, and how often is it refreshed? +
A named owner, usually the finance director, sets it at each budget or pricing cycle and records the date it was struck. It should not be silently re-based mid-year to flatter a position that has moved against you, because a rate quietly moved to match the market defends nothing.
What hedge ratio should a first policy start at? +
A flat 60% of forecast exposure is a reasonable starting point, with a floor and a cap around it. You cover the confident core of the forecast and leave headroom for error and for orders that never arrive. Over-hedging is not the cautious choice; it commits you to buying currency you may not need.
What is a dealing mandate, and what is segregation of duties? +
A dealing mandate pre-sets who may transact, up to what size, in which instruments. Segregation of duties keeps dealing, confirmation and reporting in different hands, so no one person can both place and conceal a trade. In a small team, a monthly board review of the blotter is the substitute.
What happens when a limit is breached? +
The policy has to say so in advance. Name who can approve a deviation, the finance director within a stated band and the board above it, and require that every breach is logged and reported to the board at the next review. Limits without an escalation rule are the commonest gap we see.
Should the policy address hedge accounting? +
It should make the choice explicitly, even if the choice is not to seek it. Under FRS 102 section 12 or IFRS 9 the designation must be documented at the point of dealing; a day late and the trade cannot be retro-designated. Deciding in the policy avoids discovering the volatility at year-end.
How often should the policy be reviewed? +
Re-approve it at least once a year, and whenever your risk appetite shifts. Monthly management information should show open exposures, the hedge ratio achieved against policy and the mark-to-market on live forwards. A policy nobody reviews drifts out of line with the actual book.
Comparing providers for a hedging programme?
Tell us your currencies, roughly how much you cover, whether the exposure recurs, and whether you need forwards, dealing mandates or a credit line rather than spot alone. We will help you compare providers whose terms fit the policy you are writing. You deal with them directly.
For how we compare a provider’s rate and fee against the live mid-market, see how we compare providers.