Topic 121

Hedging Currency Exposure Strategy

A mid-sized manufacturing company generates 40% of revenue from exports invoiced in foreign currencies, while most costs are in the domestic currency. Recent volatility has caused quarterly earnings swings of up to 12%, alarming the board. The CFO must recommend a hedging policy for the next fiscal year. Goals: reduce earnings volatility, preserve upside participation if currencies move favorably, and keep hedging costs and operational complexity manageable. Constraints: limited treasury staff capacity, board skepticism about derivatives after a past hedging loss, and uncertainty about future order volumes (which affects how much exposure is even real versus forecasted). Tradeoffs include cost of hedging instruments, accounting complexity (hedge accounting rules), flexibility to adjust as forecasts change, and the risk of over- or under-hedging if sales forecasts prove wrong. The options below represent different philosophies for managing this exposure.