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
