The 4 E’s of Micro-Hedging Programs

This blog explains the nuts and bolts of micro-hedging programs and the benefits they provide to corporations. By using micro-hedging programs —either on a standalone basis or in combination with other programs—, finance teams are in a unique position to: 

• Eliminate FX risk

• Enhance control

• Earn more

• Embrace currencies

So let’s dive in and explain how companies can profit from these four E’s.

Eliminate FX risk. Enhance control. Earn more. Embrace currencies.

Micro-hedging programs are API-based software solutions that allow corporate treasury teams to effectively hedge their exposure to currency risk —whatever the number of transactions— with a high degree of automation, visibility and control.

They are emerging as a key element in most corporate FX hedging strategies. The versatility and ease-of-use of micro-hedging programs, even when many currency pairs are involved, are proving themselves a must-have in different setups:

• In balance sheet hedging, where invoices are hedged to remove the accounting impact of FX gains and losses

• In transactional cash flow hedging, where firm sales/purchase orders are the key exposure item

• In forecast-based cash flow hedging, where they are used in combination with programs that hedge budgeted cash flows

The first “E”: eliminate currency risk

At first sight, the notion that currency risk can be removed with great precision, even when many transactions in different currency pairs are processed, may seem a bit outlandish. To understand how micro-hedging works, the notion of market monitoring plays a key role.

Thanks to API connectivity, stop-loss and take-profits are set around the FX rate at which a piece of exposure known as an entry —a firm order or an invoice— is received from company systems (ERP, TMS, others).

As long as the FX rate trades inside this corridor, new entries are accumulated into positions. Because each entry arrives at a different moment, and therefore at a different exchange rate, the system needs to automatically calculate the weighted average exchange rate. 

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When either of the boundaries of the range is hit, the position is automatically hedged. From the FX risk management point of view, the benefits of this procedure include: 

• Protecting the pricing rate. For each transaction, the pricing rate is equal (or very close) to the hedge rate, thus protecting every transaction from FX risk 

• Avoiding over- or under hedging. Since hedging is based on a realised exposure, there is no possibility of ending up over- or under-hedged.

• Reducing hedging costs. Setting up conditional orders allows for delayed trade execution, which reduces the impact of unfavourable forward points

But what about hedging precision? Here’s precisely the point. When the drill is performed during sufficiently long periods of time, something interesting happens:

“Over time, the stop-loss and take-profit orders tend to offset each, resulting in fluctuations around a central point. While financial time series exhibit skewness and other complexities, the overall risk typically decreases as the process unfolds” — Andrea Perissinotto, FX Data Analyst Team Lead, Kantox

And that’s how micro-hedging virtually eliminates FX risk, either in the context of transaction risk or in terms of accounting risk.

The second “E”: enhance control

In our blog Debunking 4 Currency Management Myths: Protecting Profit Margins in 2025, we discussed some myths surrounding FX hedging. We could have included another one: the notion that automation weakens managers' control over their hedging programs.

In fact, the opposite happens. Currency Management Automation makes it possible for finance teams to strengthen control throughout the different phases of the FX workflow. To illustrate the point, treasurers can, at any point in time: 

• Validate exposure data by specifying the rules of the hedging program

• Add manual checkpoints at all phases of the workflow 

• Improve the audit trail with perfect end-to-end traceability

When it comes to validating exposure data, treasurers can enforce a manual validation process according to different criteria in terms of amount, maturity and currencies. Checkpoints are also available during the trade and post-trade phases.

By way of example, Nutrien, a Canadian crop inputs provider, recently announced a $220m loss on FX derivatives transactions in Brazil:  

“We recorded a foreign exchange loss of $220 million on foreign currency derivatives in Brazil for the second quarter of 2024 [...] we have a material weakness related to our controls over derivative contract authorization in Brazil” — Nutrien

The company blames "an individual outside applicable internal policy and authority". How do automated micro-hedging programs deal with this issue? From the outset, any derivatives transaction is numerically traced back to the corresponding exposure. A fraudulent trade will thus have a very hard time progressing from the ‘pre-trade’ to the ‘trade’ phase.

Traceability and control

Control is also enhanced by the traceability feature of micro-hedging programs. Across the journey from entry to position, to conditional order, to operation, and to payment, each element has its own unique reference number.

In addition, payments carry the operation reference within their SWIFT message, allowing funds to be traced throughout the entire payment process. Whenever a position is hedged, it is possible to trace it back to the original entries, including the exchange rate.

This is called end-to-end traceability. Among other control-related tasks, it makes possible to:

• Adequately calculate profit margins. Without traceability, it would be quite difficult to determine what purchase corresponds to what sale, and at what exchange rate.

• Automate Hedge Accounting. Hedged items can be quickly traced back to the corresponding hedging instrument, including its value date and exchange rate. 

• Automate swap execution. The different ‘legs’ of a swap —the near leg and the far leg— can be easily traced back to the corresponding forward contract. 

The third “E”: earn more

The third “E” of micro-hedging programs can be illustrated with a simple proposition: improve profit margins by always contracting in the cheapest currency. With currency risk under control, managers avoid the misplaced temptation of buying directly in their firm’s own currency.

The truth is that the underlying FX risk never goes away — it is merely transferred onto suppliers, who then apply markups to protect themselves from the underlying risk. By removing this friction, markups are sidestepped and contracting costs are reduced.

This example from the Travel industry illustrates the point: 

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(*) Note that the margin increases to 5.5% by using the forward rate of 0.9730 instead. Forward points are favourable because —as interbank interest rates are higher in the U.S. than in Europe— the exchange rate translates into a higher forward EUR value, compared to spot. This gain can be used to reduce contracting costs.

The fourth “E”: embrace currencies

The fourth “E” of micro-hedging programs —embrace currencies— flows from the previous three. With FX risk under control, enhanced control over the workflow, and supplier markups out of the way, managers can confidently sell in more currencies. 

Thanks to Multi-Dealer Platforms such as 360T, to which micro-hedging programs are connected, treasurers can execute trades —in favourable liquidity conditions— in the currencies of a number of small, but well-managed economies: SEK, NOK, CAD, AUD, NZD, SGD and KRW.

A recent Amadeus survey about consumers’ attitudes shows:

• 71% spend more when shopping in their own currency

• 74% are concerned about the final bill when buying outside of their own currency

• 80% prefer to shop in their own currency

• 84% prefer to pay in their own currency

For firms with international operations, the conclusion is simple: you should sell in the currency of your customers. Some of the benefits include: 

• Entering new markets

• Cutting out intermediaries

• Reducing cart abandonment

• Reducing the credit risk in receivables

• Boosting conversions thanks to better pricing

This is happening already. A Bloomberg News article shows evidence that currency managers are sidestepping USD to conduct business in other currencies. French firms Saint-Gobain, Bouygues Construction, Veolia and Neoven are increasing operations in Australia, and so are Spanish construction companies. 

And they are just getting started. 

The strategic imperative of the Four E’s

The four E’s of micro-hedging programs —eliminate FX risk, enhance control, earn more, embrace currencies— are the logical extension of a simple business imperative. When profit margins come under pressure, as they do in the course of the normal lifecycle of a company, new market opportunities must be explored.

These opportunities entail a degree of currency risk. Crowdstrike, the US-based computer and network security solutions company, recently told investors: 

"As we continue to grow our business globally, our success will depend in large part on our ability to effectively manage [currency] risks. The expansion of our international operations and entry into additional international markets will require significant management attention. Failing to do so could limit the future growth of our business."

This is why the versatility of micro-hedging programs turns them into a strategically important resource. Because they can be applied on a standalone basis or in combination with forecast-based programs, they should be part of the toolkit of any treasury team that desires to lead the firm into the exciting, long and winding road of the multi-currency world.