Layered hedging

Financial risk management - risk response - foreign exchange - hedging.

A layered foreign exchange hedging programme hedges increasing proportions of foreign exchange exposures, as they come closer to maturity.

For example, six-month, 12-month and 18-month hedges might be executed in layered proportions, such as 80%, 50% and 20% respectively.

Once the initial six-month (80%) hedge matures, the original 12-month hedge (50%), which now has six months left to run, is topped up to 80% using a new 30% hedge.

In turn, the original 18-month hedge (20%), which now has 12 months to run, is topped up to 50%, also using a new 30% hedge.

A new 18-month hedge then captures 20% of the exposure, and so on.

A layered approach offers reduced volatility as - over time - it achieves a blended/averaged forward rate.

(Source - Ashley Garvin - Harness your hedges - The Treasurer.)

"We have a layered hedging policy, which guides us on how we hedge specific exposures. It is difficult to time specific events in the market; instead, we aim to average over a period of time."

(Daniel Wong EMBA MScFin AMCT FCCA, head of corporate treasury, British American Tobacco - January 2024.)

See also

• Foreign exchange forward contract
• Hedging
• Overhedging
• Pre-hedging
• Rolling FX forward contracts
• Rolling hedge
• Underhedging
• Volatility

Treasurer article

• Harness your hedges, April 2013