Hedging FX Risk at Corporations

Demetri Papacostas and Francesco Tonin

This chapter will examine the foundations of how to form an FX hedging strategy by exploring broad approaches to policy. It will then focus on the world of corporate treasury, and the practical (and sometimes personal) business drivers for those hedging FX. Finally, we look at some specific tools that can help create parameters around the best practices of hedging, with the aid of specific examples that clarify how the tools are used, and sometimes misused.

THE CORPORATE TREASURER AND THE FX CONUNDRUM

It is not always clear whether FX risk should be hedged, and how. In this section, we will explore those perspectives and discuss some unconventional ways that corporations approach hedging.

Hedging policy perspectives

Does hedging matter in the long run?

Before getting into the nitty gritty, it is worth remembering that one of the most legendary investors, Warren Buffett, would argue that this part of the book is mostly useless. He does not believe in hedging. Here is an excerpt from an interview: “When you are investing or buying a business with the intent of owning that business for years or decades, your focus rests solely on its fundamental attributes.”11 S. Gad

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