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balance sheet hedging

Balance sheet hedging is a hedging program designed to protect FX-denominated assets and liabilities from changes in value due to exchange rate fluctuations. Balance sheet hedging is concerned with a firm’s accounting exposure, as managers desire to eliminate accounting FX gains and losses on their financial statements.

Because accounting exposure arises later than economic exposure —which starts from the moment a transaction is priced— balance sheet hedging is not designed to protect a firm’s profit margin from currency risk. It is carried out mostly for the purposes of reporting, as the accounting exposure is clearly visible on financial statements.

Currency Management Automation solutions allow companies to combine a balance sheet hedging program with different types of budget hedging programs —static, rolling, layered— and with programs that hedge firm commitments.