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hedge ratio

The hedge ratio is the ratio of a hedged exposure to the entire corresponding exposure. A firm with high forecast accuracy can apply a higher hedge ratio to distant exposures than a firm with low forecast accuracy.

In hedging programs that combine budget hedging with hedging based on SO/POs, a given hedge ratio is applied while hedging is based on forecasts. As soon as certainty from the business is increased with sales/purchasing orders (SO/PO), a higher hedge ratio (for example, 90%) is applied on those firm commitments.

The treasury team is in effect ‘switching programs’ and starts to hedge based on SO/PO. Such a combination can be supplemented by adding balance sheet items with (for example) a100% hedge ratio.

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