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cash flow hedge

A cash flow hedge is a hedging program designed to protect a company’s expected future revenues and costs from currency fluctuations. Cash flow hedges are concerned with a firm’s economic exposure. A firm may undertake cash flow hedges to protect its budgeted exposure from FX risk.

Depending on a company’s specific situation in terms of its pricing dynamics, degree of forecast accuracy and other parameters, different types of cash-flow hedging programs can be designed to protect budgeted exposures. These include static hedging, rolling hedging, layered hedging, hedging based on firm commitments, balance sheet items hedging, and different combinations of such programs.

When hedging cash flows under Hedge Accounting, companies need to provide documentation regarding the hedged item, the hedging instrument and the methodology used to test the effectiveness of the hedge.

The implementation and management of cash flow hedging programs may be quite burdensome for treasury teams that rely on manual exposure collection and hedge execution. However, Currency Management Automation solutions allow firms to run cash flow hedging programs on a fully automated basis.