Policy and Personnel

Board-Approved Forex Policies

As part of the forex hedging implementation plan, management will develop a Foreign Currency Hedging Policy to be approved by the Board of Directors. This policy will act as a guideline for managing foreign currency risk. A detailed policy includes the following components:

• Hedging objectives
• Currency exposures
• Hedging timeframes for future exposures (3, 6, 12, or 24 months)
• Authorized hedging products
• Speculation limits and authorizations, if applicable
• Internal controls (segregation) & reporting
• Performance measures (not based on whether the hedge is profitable)
• Risk management structure
• Departmental responsibilities: trading, reporting, compliance (tax, GAAP), and management reports (treasurers, controllers, and tax)
• Board Approval

To view sample forex hedging policies for Boards and management, see the following document:

Sample Forex Hedging Policies

Properly Educated Personnel

Qualified staff is necessary to manage hedging processes, particularly for hedging future transactions and engaging in speculative trading. When your company is considering whether to hedge future foreign currency transactions, proper validation of the forecasted foreign currency exposures requires good judgement and investigation skills. Your staff must be qualified and trained to identify and manage these exposures effectively.

Speculative forex transactions carry a higher than average degree of risk, and forex speculation is not a recommended activity for companies (unless it is the prime focus of their business). If your company decides to trade foreign currencies speculatively, be aware of the risks. For example, in addition to the normal volatility, risk can also be associated with factors such as changes in a country's political condition, economic climate, or acts of nature, all of which may substantially affect the price or availability of a given currency. You must, therefore, carefully consider your investment objectives, level of experience, and appetite for such risk prior to entering this speculative market. Most importantly, do not invest money that your company is not in a position to lose.

Counterparty Risk

Every contract carries the risk (for each party) that the counterparty will not live up to its contractual obligations or will default. For example, the provider may not execute the foreign currency transaction as directed. Or, once the forex transaction is executed, there is a risk of default if the provider didn't hedge out the transaction with another customer’s trade or with another forexliquidity provider.

To help manage risk, you must verify counterparty viability before placing any trade with them. For example, verify that the counterparty:

• has extremely good credit
• has a strong capital position
• has risk management policies which hedge out any net forex exposures to an appropriate liquidity provider. The use of margin accounts should eliminate the counterparty’s exposure to any customer losses

As an example, US-based counterparties must have either a single A credit rating from a major credit rating agency or a minimum of $50 million in Excess Regulatory Capital, as defined in the monthly reporting to the Commodity Futures Trading Commission (CFTC).