What a corporate hedging policy should include

Companies that buy fuel, metals or agricultural inputs often feel the cost in the margin of the following quarter. A series of isolated transactions, decided when the price has already moved, is not a policy. A policy states in advance how much of the exposure may be addressed, with which instruments, over which maturities, and within which limits.

What the document should settle

• The exposure itself: physical consumption or purchase volumes, converted into a hedging notional the board can recognise.
• The coverage ratio: how much of that notional the policy permits to be hedged, and how much remains open.
• The instruments and the maturities that are permitted, and those that are not.
• Risk limits, including who inside the company may act and what requires a further approval.
• The review cycle: a look at each position before it matures, and a quarterly report on hedge effectiveness for management and for the auditors.

Who does what

Management or the board approves the policy. The client’s treasury team executes it with the client’s own financial institution. An advisor can diagnose the exposure, draft the policy, and review it over time. The advisor does not need access to the company’s accounts, and should not be the party that places the transactions.

Hedging strategies involve risk, including market, counterparty and liquidity risk. Past or estimated results do not guarantee future results. This note is general information and is not investment advice or an offer of any financial product.