Hedgingpolicy

Hedgingpolicy, or hedging policy, is a formal framework within an organization that governs how it uses hedging strategies to manage financial risk. It sets the rules for selecting exposures, eligible instruments, governance, and reporting.

Scope and objectives: The policy identifies covered exposures such as currency, interest rate, commodity, and equity risk; defines hedging horizons, targets, and the level of earnings or cash flow volatility the organization seeks to limit.

Instruments and designation: It specifies permitted instruments (forwards, futures, options, swaps) and criteria for designating hedges and applying hedge accounting. It may acknowledge natural hedges and address counterparty risk, liquidity, and collateral arrangements.

Governance and controls: The policy assigns roles to the board or risk committee and treasury function, describes approval workflows, limits on notional exposure, documentation requirements, and requirements for periodic monitoring and independent review.

Accounting and reporting: It requires ongoing hedge documentation, assessment of effectiveness, and disclosure in financial statements. It aligns with applicable accounting standards such as IFRS 9 or US GAAP and requires tracking of hedge ineffectiveness, if any.

Compliance and risk management: The hedging policy addresses regulatory considerations, vendor and counterparty oversight, and the potential impact on earnings, capital, and debt covenants. It also calls for training and governance to ensure consistent application.

Examples and limitations: A multinational may hedge foreign-currency revenue using currency forwards, while recognizing that hedges carry basis risk, funding costs, and model risk. The policy emphasizes cost-benefit analysis and periodic review.