A layered hedging strategy is an FX hedging program designed for firms that require continuity on pricing period after period, i.e. firms that need to keep prices constant—even on the back of an adverse intra-period currency movement known as a ‘cliff’.  Firms in this scenario need to achieve a smooth hedge rate over time. In order to achieve a smooth hedge rate, successive layers of hedges are applied as time passes (for example, 1/12 of the exposure is hedged every month). The resulting commonality in hedge rates creates a ‘smooth hedge’.  Depending on the goals of the firm, on the reliability of its forecasts, and on the forward points situation, layered hedging programs can be adjusted and combined with programs that hedge firm commitments (sales/purchase orders) and balance sheet items (accounts receivable/payable).  These programs and combinations of programs can be very demanding in terms of calculations and/or currency trading, a real challenge for treasury teams relying on manual procedures. Their proper implementation and management requires, therefore, the application of Currency Management Automation solutions.

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Learn more about layered hedging strategies in our blog: Hedging Strategies 101: Layered Hedging