Discover essential FX hedging strategies and currency management best practices from our foreign exchange experts.
Debunking 4 Currency Management Myths: Protecting Profit Margins in 2025
When it comes to protecting profit margins with micro-hedging programs, most textbooks on corporate finance start with a discussion about the nature of currency risk. Next, they deal with risk mitigation through exposure netting and FX derivatives.
This is a world of pristine simplicity, centred on transaction risk. Quite obviously, things are much more complicated in the real world, as firms have different pricing models and types of exposure to currency risk.
By challenging some of the most common, but persistent myths around micro-hedging programs to protect profit margins, this blog will help you improve your decision-making as a currency manager.
Some of the most entrenched myths include:
- One-size-fits-all FX hedging is enough
- Only risk managers are involved
- The 20%-40%-60%-80% oversimplification
- The need for super-accurate cash flow forecasts
Let us briefly tackle these myths one by one. And, most importantly, let us see what real-life best practices in FX risk management recommend when it comes to the issues involved.
Myth #1: One-size-fits-all solutions
Open up a book on currency risk management and you will see that transactional FX risk management is, mostly, the only game in town. Granted, there will always be an explanation of the different types of exposure to currency risk. But any example or illustration will tend to refer to individual, FX-denominated transactions.
This approach leaves aside the challenge of protecting profit margins in the context of forecasted revenues and expenditures, instead of firm sales/purchase orders like in transactional hedging. But hedging based on forecasts creates three challenges:
- Forecast risk. This goes hand in hand with the risk of ending up over-hedged
- Forward points. They may make hedging expensive when selling (buying) in forward discount (premium) currencies
- FX markets opportunities. Can currency managers profit from them?
The dilemmas involved are easy to spot. Managers need to protect the budget rate, instead of the pricing rate in each transaction. In addition, the FX hedge rate displays a forward premium or discount compared to the spot rate—and the reality is that most firms have to face both scenarios.
Finally, treasury teams would welcome some flexibility in order to take advantage of possible favourable moves in currency markets. These difficulties, conveniently absent from most textbooks, illustrate the the lack of realism that is the hallmark of ‘one-size-fits-all’ FX hedging solutions.
When it comes to protecting profit margins in the real world (as opposed to textbooks), best practices indicate three types of FX hedging programs that reflect major scenarios in terms of pricing:
- Firms that frequently update prices. Standalone micro-hedging programs for firm sales and/or purchase orders
- Firms with catalogue-based pricing. Static hedging combined with micro-hedging programs for firm commitments
- Firms that price across budget periods. Layered hedging combined with micro-hedging programs for firm commitments
Myth #2: Only risk managers are involved
Where does FX hide in the business? This may be a surprising question to ask, given that most observers treat currency risk management as a ‘finance-only’ topic.
In ‘siloed’ environments, CFOs talk about risk management and CEOs talk about growth. But what if treasurers could tell the C-suite that currencies can be used to spur growth in a decisive way? The case of Marriott International illustrates the point.
CEO Anthony Capuano recently mentioned the group's Bonvoy app: "Downloads rose nearly 30%. Our digital channels remain key drivers of direct bookings". Here's where FX is 'hidden': as a growth engine that generates high-margin sales. It is not a 'finance-only' topic!
The case of Marriott International shows that FX may be ‘hidden’ above the EBIDTA line, at the level of the gross margin. Treasurers can do a better job at explaining this. Once the growth-oriented function of currency management is properly understood, protecting profit margins with micro-hedging becomes a necessity.
Myth #3: The myth of oversimplicity
An article by Risk.net's Cole Lipsky mentions the prevalence of 20%-40%-60%- 80% layered hedging programs at US-based firms, as they tackle FX headwinds from the strong USD. This reflects what we call at Kantox the problem of oversimplicity.
Such currency hedging programs beg the question: how do we know that the 20%-40%-60%- 80% schedule represents, for a given treasury team, the optimal solution in terms of:
- achieving a "smooth" hedge rate over time?
- optimising forward points?
Here’s Kantox's Antonio Rami on the subject:
"Do not oversimplify with a 20%-40%-60%-80% layered FX hedging program just because of its easy implementation. The excessive simplicity of the model can have a huge impact, not only on the principal goal (a smooth hedge rate), but also on secondary goals such as the optimisation of forward points”.
Myth #4: The need for super-accurate cash flow forecasts
The treasury world stands in awe in the face of GenAI tools that are applied to increase cash flow forecasting accuracy. During a meeting of the European Association of Corporate Treasurers Summit in Brussels, ASML’s Jeroen Van Hulten mesmerised the audience as he presented an AI tool that took forecasting accuracy from 70% to over 96%.
This is certainly remarkable. Yet, at Kantox we hold an out-of-consensus view: forecasting accuracy is overstated. For most companies, it should not be a major problem when deploying their FX risk management program. By design, a layered hedging program tackles the problem of forecast inaccuracy head-on, as it ‘builds’ the FX hedge rate in advance.
And that’s not all. By adding a micro-hedging program for firm commitments, hedging is applied to near-certain exposures. With the right technology, hedging programs —and combinations of programs— can achieve a high standard of precision on their own, even with less-than-perfect forecasting accuracy.
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How technology puts FX risk managements myths to rest
The last blog of this series will be devoted to a detailed discussion of the automation requirements in best-practices solutions for protecting profit margins from FX risk. We can already anticipate one conclusion: complex currency management scenarios —an undeniable reality in 2025— call for more, not less, technology.
Understanding and properly managing currency risk is a challenging undertaking. As complexity increases, manually executing the required tasks will become more difficult. What’s more, it would add an unnecessary layer of operational risk in the shape of email risk, spreadsheet risk and key person risk—and that’s the last thing treasurers need.
