Entdecken Sie von unseren Devisenexperten wichtige Strategien zur Währungsabsicherung und Best Practices für das Währungsmanagement.
Debunking 4 Currency Management Myths: Protecting Profit Margins in 2025
When asked about the importance of debunking myths in business, ChatGPT gave a series of plausible, but mostly vague answers like “encouraging innovation” and “building trust”. The only answer I decided to retain was the most obvious and down-to-earth: debunking myths is good because it improves decision-making.
This is exactly what happens, in currency management, when it comes to programs aimed at protecting profit margins. By challenging some of the most common, but persistent myths, this blog aims to help you improve your decision-making as a currency manager.
Some of the most persistent 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. This 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 can display a deep 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 degree to which ‘one-size-fits-all’ solutions for protecting profit margins from currency risk are a far cry from what treasurers need in the real world.
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 that is mostly concerned with a risk mitigation exercise through exposure netting or the use of derivatives instruments.
That is why we see so many ‘siloed’ approaches, where CFOs discuss risk management, while CEOs talk about growth. But what if treasurers could communicate to the C-suite that currencies can be used to spur growth? 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—and not exclusively as a 'finance-only' topic.
In other words: FX is not something that has only an impact on the line below EBITDA —it is ‘hidden’ above, right at the level of the gross profit margin. Treasurers can do a better job at explaining this. Once this is properly understood, protecting profit margins with FX hedging programs can be integrated as a strategic necessity—and not only as risk mitigation.
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
As the Artificial Intelligence revolution unfolds, the treasury world stands in awe in the face of GenAI tools that seem to sharply increase cash flow forecasting accuracy. During a meeting at 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%.
At Kantox we hold an out-of-consensus view: the importance of forecasting accuracy is overstated. Forecast inaccuracy should not be a problem for most companies 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.
How to protect profit margins?
How to deal with interest rate differentials?
How to deal with clouded forecast accuracy?
Firms with dynamic prices
Sales/purchase orders or balance sheet items can be hedged with great precision
Depending on forward points, hedging can be anticipated or delayed
The exposure is made up of contractually binding elements that are not forecasts at all
Firms with fixed prices for individual campaigns
The budget rate is systematically protected thanks to a safety net with stop-loss orders
Depending on forward points, hedging can be anticipated or delayed
Conditional orders provide managers with time to update their forecasts
Firms with steady prices during several campaigns
The smooth hedge rate reduces cash flow variability period after period
Depending on forward points, hedging can be anticipated or delayed
Instead of protecting an FX rate, the hedge rate is built in advance, layer by layer
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 increasingly difficult. It would add a completely 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.