FX & Currency Risk Management

Dashboard

Real-time overview of FX exposure, hedging positions, and risk metrics. Covers total exposure by currency, hedge ratio summary, var at a glance and p&l impact tracker.

Exposure Map

Comprehensive mapping of all FX exposures by entity, currency, type, and maturity. Covers transaction exposure detail, translation exposure summary, economic exposure estimates and maturity profile by currency.

FX Rates

Historical and current exchange rate data for all relevant currency pairs. Covers spot rates, forward points and curves, historical rate time series and volatility calculations.

VaR Calculation

Calculates portfolio-level currency Value at Risk using variance-covariance methodology. Covers individual currency var, portfolio var with correlations, diversification benefit and confidence level options.

Hedging Strategy

Designs optimal hedging programs by currency with instrument selection and hedge ratios. Covers hedge ratio by currency, instrument selection (forwards, options), rolling hedge program design and cost of hedging analysis.

Hedge Effectiveness

Tests whether hedges qualify for hedge accounting under IFRS 9 / ASC 815. Covers retrospective effectiveness testing, prospective assessment, dollar offset method and regression analysis.

Scenario Analysis

Models the impact of specific FX rate movements on the portfolio. Covers currency crisis scenarios, central bank policy changes, emerging market stress and multi-currency shock analysis.

Policy & Limits

Documents the FX risk policy framework including limits, authorities, and escalation procedures. Covers risk appetite definition, hedge ratio guidelines, counterparty limits and approval authorities.

Reporting

Generates standard treasury reports for management, board, and audit review. Covers monthly fx risk report, hedge position summary, p&l attribution by currency and policy compliance status.

FX VaR (Parametric)

VaR = Exposure × σ × z × √t

Value at Risk for a single currency exposure, where σ is volatility, z is confidence factor, and t is time horizon.

Portfolio VaR

VaR_p = √(w'Σw) × z

Portfolio-level VaR accounting for correlations between currency exposures using the variance-covariance matrix Σ.

Forward Rate

F = S × (1 + r_d)/(1 + r_f)

Covered interest rate parity — the forward rate implied by the interest rate differential between domestic and foreign currencies.

Hedge Effectiveness

Effectiveness = ΔHedge Value / ΔExposure Value

Dollar offset ratio comparing changes in hedge value to changes in hedged item value. Must be within 80-125% for hedge accounting.

1.Map All Currency Exposures Across the Business

Effective FX risk management starts with a complete inventory of currency exposures. Identify transaction exposures (committed future cash flows in foreign currencies — receivables, payables, contracts), translation exposures (foreign subsidiary balance sheets that must be consolidated), and economic exposures (competitive effects of exchange rate changes on pricing power and market share). Most companies undercount their exposure by focusing only on transaction risk. A comprehensive exposure map is the foundation for everything that follows.

2.Quantify Risk Using VaR and Scenario Analysis

Once exposures are mapped, quantify the potential financial impact. Value at Risk (VaR) provides a statistical estimate of the maximum expected loss over a given time horizon at a specified confidence level. Supplement VaR with historical scenario analysis — what would happen to your portfolio if the 2008 financial crisis or 2022 dollar rally repeated? Scenario analysis captures tail risks that parametric VaR may underestimate. Together, these tools give management a clear picture of how much FX movements could cost the company.

3.Design the Hedging Strategy Based on Risk Appetite

The hedging strategy should flow directly from the company's risk appetite — how much FX-driven volatility in earnings and cash flow is the board willing to accept? Common approaches range from a natural hedging strategy (matching foreign currency revenues with foreign currency costs) to systematic financial hedging using forwards, options, or cross-currency swaps. Define hedge ratios by currency and tenor — many companies hedge 75-100% of near-term exposures and taper off for longer horizons where forecast uncertainty is higher.

4.Implement Hedge Accounting Where Applicable

Without hedge accounting, financial hedges can increase earnings volatility even though they reduce economic risk — because hedge gains and losses are recognized in the P&L immediately while the hedged item may not be. Under IFRS 9 or ASC 815, qualifying hedges can be designated as cash flow hedges or fair value hedges, deferring hedge P&L to match the timing of the hedged exposure. Proper documentation of the hedging relationship, effectiveness testing, and designation at inception is essential to qualify for hedge accounting treatment.

5.Monitor, Report, and Adapt Continuously

FX risk management is a continuous process, not a quarterly exercise. Implement rolling exposure forecasts that update as new contracts are signed and old exposures settle. Track hedge effectiveness and P&L attribution — how much of your FX gains or losses came from unhedged exposure versus hedge ineffectiveness? Report to management monthly with clear metrics: net open position by currency, VaR utilization against limits, and realized hedging costs. Adapt the strategy as the business evolves — entering new markets, changing supplier currencies, or shifting competitive dynamics all change the exposure profile.