All companies operating internationally will be exposed to foreign currency exchange (FX) risk. Financial derivatives are products that can be utilized to reduce the impact that movements in FX rates can cause in financial statements.
As part of a strong FX risk management program, companies should create an FX risk policy, identifying key risks and strategies to mitigate those risks. This will allow the company to clearly document their risk thresholds, corporate goals and overall strategy for all stakeholders. Companies should find a balance between policies being specific enough to provide guardrails but also broad enough that they do not need to be amended or revised for each and every new situation that arises.
Additionally, companies should be sure to monitor their organization for times where it makes sense to revisit and amend the policy/strategy. For example, companies should at least consider modifying the FX risk management policy as the company changes in size or ownership (private to public, for example), new geographies are entered, a merger or acquisition is closed, additional product lines are added, the organizational structure changes, etc.
The draft foreign exchange hedging policy included in the full advisory linked below is intended to provide a risk management framework that can be customized to meet an individual company’s needs. Policies can vary substantially between companies, based on the nature of the business model risk, the degree of flexibility required in meeting risk management objectives and the desired level of specificity. Basic policy considerations are included in the attached, addressing each key element of policy at a high level, as well as language supporting basic regulatory requirements under Dodd-Frank. Some areas may not be applicable to your specific situation.
We strongly suggest consulting with your risk, tax and accounting advisors as part of creating a risk management program and the related policy documentation. The example policy is provided for illustrative purposes only, it is not making specific recommendations about products, strategies, accounting treatment or any other area of risk management. All policies should be written specifically for the company’s situation and goals.