5 Things to Consider When Planning an FX Policy
By Amarjit Sahota, Director, Klarity FX
May 8th, 2025
Foreign exchange risk is one of the few financial exposures that companies face daily—but often manage without a clear plan. Currency moves can erode margins, distort earnings, and complicate planning, especially when rates shift on data or policy surprises. Yet many firms rely on informal practices or legacy playbooks that don’t match their current operations. Companies with meaningful foreign currency exposure should have a documented policy that outlines how FX risk is identified, measured, and addressed. A good policy goes beyond general guidelines—it ties directly to the company’s revenue model, cost base, and financial objectives. This policy approach outlines a practical approach to building or improving an FX risk policy that works under real business and market conditions.
Identify the Risks
Start by listing out all forms of FX exposure: transactional (such as receivables or payables), translational (accounting impacts on consolidation), and economic (longer-term strategic positioning). Some exposures are straightforward—like a USD invoice issued by a European exporter. Others are more indirect, such as pricing contracts in a third currency or supply chain risks that only become visible when inputs are delayed or repriced.
It’s also important to consider when exposures arise. Is it at the time of sale, invoice, or delivery? Different companies will define this differently depending on their internal processes and accounting treatment. Once exposures are listed, look for natural offsets across the business, and consider whether any commodity-linked pricing overlaps with FX—like the link between oil and CAD, or metal inputs and AUD. These relationships become more important in periods of volatile energy and input costs, where FX moves may be driven by broader macro trends.
Measure the Risks
You can’t manage risk without understanding its size. A useful starting point is scenario analysis: how does a 1% or 1-cent move in a currency affect earnings, margins, or cash flow? This type of framing makes FX risk more tangible for leadership. For companies with less predictable revenue or costs, a simple moving average can be used as a proxy rate. For example, a 3- or 6-month average can align the hedge program more closely to the revenue cycle without relying on forward-looking projections that may shift.
During times when markets react strongly to US jobs data, Fed guidance, or changes in global trade sentiment, relying solely on spot rates can lead to inconsistent decisions. Using a rolling average as a policy reference point helps maintain stability and reduces the pressure to time entries based on headlines.
Define the FX Objectives
Objectives should reflect what the company is trying to achieve—be it earnings stability, budget certainty, or protection of contractual margins. It’s equally important to define when not to hedge. If the cost of hedging is too high, or if the exposure is immaterial, the policy should allow room for discretion.
Establishing thresholds is a helpful way to guide action. These can be defined by volume, value-at-risk, or materiality to earnings. Without these boundaries, hedge decisions can become inconsistent over time, especially as markets shift expectations quickly—like the recent swings between soft inflation data and persistent wage strength in the US. Clear objectives also help keep the focus on reducing real risk, rather than responding to sentiment.
Select and Develop an FX Program
Once exposures and objectives are defined, the next step is building a hedging approach that works in practice. Internal tools like netting, invoicing in functional currency, or matching revenues and costs in the same currency should be the first options considered. External hedging using forwards or options should match the company’s exposure timeline and credit capacity. It’s not always feasible to hedge 100% of projected flows, especially when forecasts change or hedge accounting requirements aren’t met.
Recent rate divergence between central banks has made timing more difficult, as spot levels may reflect short-term policy speculation rather than structural fundamentals. In that context, programs that layer coverage gradually or use fixed schedules can reduce overexposure to single entry points. Having a rule-based approach is especially helpful when FX moves are driven less by data and more by expectations around future easing or tightening cycles.
Establish Controls & Guidelines
Strong governance is essential for ensuring the FX policy is followed consistently. At a minimum, the policy should define:
- Who is responsible for monitoring exposures and reporting
- Which roles are authorized to execute trades and under what limits
- Which instruments and counterparties are approved
- How trades are confirmed and recorded
Even straightforward hedging programs can go off course without proper checks in place. Common-sense procedures, like dual approval or regular exposure reviews, help avoid errors and provide accountability. These controls also support internal transparency, particularly when FX results flow into financial reporting.
The FX policy is not just a risk control tool—it’s a coordination mechanism. In a year where equity markets, central banks, and commodities are sending mixed signals, companies with a disciplined policy are in a better position to stay focused on execution. The structure matters—especially when markets don’t follow a predictable script.
