Layered hedging: Difference between revisions
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''Financial risk management - risk response - foreign exchange - 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 | 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 | For example, six-month, 12-month and 18-month hedges might be executed in layered proportions, such as | ||
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* [[Overhedging]] | * [[Overhedging]] | ||
* [[Pre-hedging]] | * [[Pre-hedging]] | ||
* [[Rolling FX forward contracts]] | |||
* [[Underhedging]] | * [[Underhedging]] | ||
* [[Volatility]] | * [[Volatility]] | ||
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*[http://www.treasurers.org/node/8925 Harness your hedges, April 2013] | *[http://www.treasurers.org/node/8925 Harness your hedges, April 2013] | ||
[[Category:Accounting,_tax_and_regulation]] | [[Category:Accounting,_tax_and_regulation]] | ||
[[Category:Financial_products_and_markets]] | [[Category:Financial_products_and_markets]] | ||
Revision as of 23:01, 28 February 2024
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
- Underhedging
- Volatility
