How to Build an FX Hedging Policy: A Framework for Finance Directors
Most mid-sized businesses hedge currency risk the same way: someone in finance notices a payment is due, checks whether the rate looks "alright", and either books it or waits a few days.
That isn't a strategy. It's a series of unconnected decisions made under time pressure by someone whose actual job is something else.
A written FX policy fixes that. It doesn't need to be long — three pages is plenty for most businesses — and it doesn't need a treasury team to maintain. What it needs is answers to six questions.
Step 1: Map the exposure
You cannot manage what you haven't measured, and most businesses have never written their exposure down in one place.
Build a simple twelve-month grid: currency across the top, months down the side. Then populate it with:
Committed outflows — signed contracts, confirmed POs, agreed supplier payments
Committed inflows — invoices raised in foreign currency, contracted receipts
Forecast flows — expected but not yet contracted, with a confidence percentage attached
Balance sheet items — foreign currency bank balances, intercompany loans, overseas subsidiary values
Two things usually emerge from this exercise, and both surprise people.
First, gross exposure is almost always larger than anyone estimated. Second, net exposure is often meaningfully smaller than gross, because inflows and outflows in the same currency partially cancel each other out.
A business paying €3m to European suppliers and receiving €1.2m from European customers has €1.8m of genuine exposure, not €3m. Hedging the gross figure means paying to manage risk that doesn't exist.
That offsetting is called a natural hedge. It's free, and it's the first thing to look for.
Step 2: Define the risk in business terms
"The euro might move" isn't a risk statement anyone can act on. Convert it into something the board recognises.
Three measures do the job:
Value at Risk (VaR) — the maximum loss you'd expect from currency movement over a given period, at a given confidence level. Useful for framing worst-case scenarios.
Cash Flow at Risk (CFaR) — how much your forecast cash flow could vary because of exchange rates. Useful when covenant headroom or working capital is tight.
Earnings at Risk (EaR) — how much net profit could move. This is the one that gets attention in a board meeting.
You don't need modelling software. A workable approximation: take your net annual exposure, apply a realistic adverse move (GBP/EUR and GBP/USD have both seen 8–10% swings within a single year on more than one occasion in the last decade), and express the result as a percentage of forecast operating profit.
If a plausible currency move wipes out 20% of your profit, you have a board-level issue, not a payments issue. That single sentence is usually what turns FX from an administrative task into a strategic one.
Step 3: Set the hedge ratio
This is the core of the policy: how much of the exposure you cover, and when.
A layered structure works for most businesses:
0–3 months
Hedge ratio: 90–100%
Rationale: Committed, high certainty, no time to recover from a move
3–6 months
Hedge ratio: 60–80%
Rationale: Mostly committed, forecasts firming
6–12 months
Hedge ratio: 30–50%
Rationale: Forecast-driven, retains flexibility
12 months+
Hedge ratio: 0–25%
Rationale: Strategic only, if visibility genuinely supports it
Adjust for your own circumstances. Businesses with thin margins, fixed-price contracts or covenant pressure hedge more. Businesses that can reprice quickly, or whose customers absorb currency movement, can hedge less.
The critical discipline is that the ratio is decided in advance, in writing, when nobody is under pressure — not in the moment, when the rate has just moved and someone is tempted to wait.
Step 4: Choose the instruments
The policy should state which tools are permitted and who can authorise them.
Forward contracts — for committed exposure. Fix the rate, obligation to settle.
Vanilla options — for probable but uncertain exposure (tenders, pipeline, conditional deals). Premium paid, full downside protection, upside retained.
Limit orders — to target a better rate on flexible timing, with no obligation.
Stop-loss orders — to cap the damage on unhedged exposure while leaving upside open.
Collection accounts and currency accounts — to hold foreign currency and match inflows against outflows rather than converting twice.
Many policies also state what is not permitted, and this matters more than it sounds.
If the policy says "hedging instruments may only be used against identified underlying exposure, and speculative positions are prohibited," you have removed an entire category of risk with one sentence.
Step 5: Assign authority and controls
Short section, high value:
Who can execute trades, and to what value
Who must approve above that threshold
Dual authorisation requirements for payments
Which counterparties are approved, and their regulatory status
Standing rule on callback verification for any change to beneficiary bank details
That last one isn't strictly an FX control, but invoice redirection fraud targets international payments specifically, and the policy document is the right place for it.
Step 6: Set the review cycle
Policies rot. Build in:
Monthly — update the exposure map with actuals and revised forecasts
Quarterly — review hedge ratios against policy, report mark-to-market position
Annually — reassess the policy itself against how the business has changed
The reporting matters as much as the hedging. A finance director who can show the board a hedged rate, a budget rate and the variance between them has converted an unmanaged risk into a managed number.
What good looks like
A business operating to a policy can do things an unhedged competitor can't:
Quote fixed prices in a customer's currency with confidence
Tender for longer contracts without pricing in a currency buffer
Forecast cash flow accurately enough to plan investment
Explain margin variance to a board or lender without pointing at the exchange rate
Stop treating every payment as a decision
None of that comes from getting a better rate. It comes from removing uncertainty from a part of the business that was quietly generating it.
The uncomfortable question
If you don't have a written policy, your business still has an FX strategy. It's just an implicit one: hedge nothing, convert when payments are due, accept whatever the market gives you.
That's a legitimate choice for some businesses. It's only a problem when nobody has actually chosen it.
Businesses Don’t Need Another FX Broker
There are thousands of FX brokers, and Orbis is not interested in becoming simply another one.
The traditional model is pretty straightforward. Call a client, ask if they need euros or dollars, give them a rate, book the trade, then call them again next week.
There’s obviously a place for execution. But Orbis believes SMEs should expect more than that now.
Understanding why the currency is being bought
If a business needs to buy €250,000, Orbis can provide an exchange rate. But that alone doesn’t reveal very much.
Orbis would rather understand: What’s the €250,000 for? When was the supplier price agreed? When does it need paying? Is this happening every month? What’s the annual exposure? What’s the margin on the product? What exchange rate was used when it was priced? What happens if sterling drops 5%?
That is where the real conversation starts, because Orbis can begin to understand the underlying risk.
Sometimes the FX isn’t even the real problem
This is something Orbis is seeing more and more.
A business comes to Orbis with an FX problem. Once everything is mapped out, it may become clear that part of the problem is actually cash flow.
Maybe the customer pays in 60 days but the overseas supplier wants payment in 30. Now there is a working-capital issue as well.
That opens up a completely different conversation. Could invoice finance help? Could trade finance help? Could the international payment structure be improved? Could the business collect foreign currency directly rather than constantly converting backwards and forwards?
That is far more valuable than simply trying to win the next €50,000 trade.
Broker → Adviser → Strategic Partner
This is something Orbis talks about internally.
First, an FX provider has to be a good broker. Understand the market. Understand the products. Understand execution.
Then it needs to become an adviser. Understand the client’s exposure and help the client make better decisions.
But ultimately, Orbis aims to sit in the third category:
Strategic partner.
A partner the CFO or FD can call and say:
“Here’s what the business is trying to do over the next 12 months. How can Orbis help?”
Maybe that’s FX. Maybe it’s collections. Maybe it’s funding. Maybe one of Orbis’ partners needs to be brought into the conversation.
That’s where Orbis believes the industry is heading. And it’s where Orbis is positioning the business.
So if the current relationship with an FX provider mainly consists of calls asking:
“Anything to buy today?”
Maybe it’s worth having a different conversation.
Your Bank Might Be Charging You More for FX Than You Think
Here’s something any FD or CFO who makes regular international payments should do. Find out exactly what you’re paying for FX.
Not the £10 payment fee. The actual margin inside your exchange rate. Because there’s a big difference.
Orbis has spoken to plenty of businesses over the years who think they’re getting a good FX deal because they’re paying very little in visible fees. Then we look at the exchange rate. That’s where the cost is.
A 1% difference doesn’t sound like much
Let’s say you’re exchanging £100,000. 1% is £1,000. Maybe that doesn’t sound business-changing.
But if you’re exchanging £2m over a year? That’s £20,000.
2%? £40,000.
3%? £60,000.
Suddenly it’s worth looking at. And that’s money that can disappear without ever appearing on an invoice marked:
“FX charge: £60,000.”
It’s simply built into the exchange rate.
But there’s another mistake businesses make
They become obsessed with shaving a tiny amount off the transaction margin while ignoring the bigger risk.
Let’s say you save 0.5% on the cost of buying €500,000. Great. But then you leave another €1m completely exposed and sterling falls 5%.
The wrong battle has been won.
This is why FX shouldn’t purely be a conversation about:
“What’s your rate?”
There are really two questions:
Are you getting competitive pricing?
And:
Are you managing your currency exposure properly?
You need to look at both.
Here’s what to ask your current provider
Ask them:
What’s the live interbank rate?
What’s the rate you’re giving me?
What’s your margin?
How much did you make from our account last year?
A good provider shouldn’t be uncomfortable answering those questions.
Transparency in FX needs to improve. Businesses should know what they’re paying. And if you’re putting £1m+ through the market every year, it’s absolutely worth finding out.
Orbis can benchmark an existing FX setup pretty quickly. Sometimes everything looks good. Sometimes thousands of pounds in unnecessary cost are identified.
Either way, at least you know.
Spot or Forward? You’re Probably Asking the Wrong Question
We get asked this a lot.
“Should we be buying spot or should we book a forward?”
And the answer is normally:
It depends.
Not particularly exciting, but it’s true.
If somebody tells you every business should be hedging everything, I’d be cautious.
Equally, if you’re buying millions in foreign currency every year and doing absolutely everything on spot because “that’s what we’ve always done”, I’d question that as well.
Let’s make this really simple
You’ve got a €100,000 supplier payment tomorrow.
You buy the euros at today’s rate.
That’s spot.
You’ve got a €100,000 supplier payment in three months and you agree the exchange rate today.
That’s a forward.
The big advantage of the forward isn’t necessarily getting a better rate.
It’s knowing what that €100,000 is going to cost you.
That’s the important bit.
“But what if the rate gets better?”
Probably the most common question we hear.
And it’s completely understandable.
You book a forward at one rate and then watch the market improve.
It’s frustrating.
But you’ve got to remember why you hedged in the first place.
If you took out home insurance and your house didn’t burn down, you wouldn’t complain that you’d wasted the premium.
You protected yourself against something you didn’t want to happen.
FX hedging is similar.
If your business can comfortably absorb currency movements, fine.
Stay more exposed.
But if a 5% move wipes a big chunk off your margin, that’s a completely different conversation.
It doesn’t have to be all or nothing.
This is probably the biggest point.
You don’t necessarily have to choose between:
100% spot
or
100% hedged.
Let’s say you’ve got €1m of fairly predictable purchases over the next six months.
Maybe you protect part of it.
Maybe you leave some open.
Maybe you protect more of the requirements you’re highly confident about and less further into the future.
There are plenty of ways to approach it.
But the strategy should come before the product.
That’s why when somebody asks us:
“Should I book a forward?”
We’d rather first ask:
“Show us what you’ve actually got coming up.”
Then we can have a proper conversation.
Why Most SMEs Don’t Actually Have an FX Strategy
Most businesses we speak to don’t have an FX strategy.
They have an FX process.
An invoice comes in. Someone in finance logs into the bank or calls their FX provider. They check the rate, buy the currency and pay the supplier.
Job done.
Except that’s not really managing FX risk.
If you’re spending £1m, £2m or £5m a year buying euros, dollars or another currency, movements in the exchange rate can have a serious impact on your margins.
And the strange thing is, plenty of businesses know exactly what they’re spending on salaries, rent, finance, raw materials and pretty much every other major cost.
But ask them what a 5% move in GBP/EUR would do to their annual cost base and quite often nobody has actually worked it out.
That’s where we’d start.
Stop trying to predict the market
One thing we’re constantly trying to get clients away from is the idea that FX management is about predicting where the pound is going.
It isn’t.
Nobody knows exactly where GBP/EUR will be in three months’ time. Neither does your bank. Neither does your broker.
We can have a view. We can look at the data. We can understand what’s driving the market.
But building your entire strategy around a prediction isn’t risk management.
It’s speculation.
The better question is:
If the market moves against us, what does that actually do to our business?
Let’s say you know you’re going to buy around €2m over the next 12 months.
Map it out.
When will you need it?
How certain are those requirements?
What’s your budget rate?
What happens to your margin if sterling drops 3%?
What about 5%?
At what point does it become uncomfortable?
Once we know those answers, we can actually start talking about strategy.
You don’t necessarily need to hedge everything
Another misconception is that having an FX strategy means locking everything in.
It doesn’t.
In fact, blindly hedging 100% can create another problem if your forecast changes.
There might be a good argument for protecting more of the currency you’re confident you’ll need over the next three months, slightly less further out and leaving some exposure open.
Every business is different.
That’s the point.
Your FX strategy should be built around your business, not whatever product somebody wants to sell you that month.
I look at FX more like insurance
My background before FX was in insurance, and I’ve always looked at the two in quite a similar way.
You don’t insure your building because you think it’s going to burn down on Thursday.
You insure it because you’ve identified a risk that you’re not prepared to carry completely yourself.
FX should be approached in much the same way.
If currency movements can materially affect your margins, you need to decide how much of that risk you’re comfortable carrying.
The objective isn’t to beat the market.
It’s to protect the business.
That’s a very different mindset.
At Orbis, that’s why we increasingly start relationships with an exposure mapping session rather than simply asking:
“Do you need to buy any currency today?”
Because before we talk about the trade, we want to understand the reason the trade exists.
Forward Contracts Explained: How Importers Fix Their Rate and Protect Their Margin
Most businesses don’t lose money on foreign exchange because they paid a fraction of a percent too much on a single transfer.
They lose money because there was a gap between the moment they agreed a price and the moment they paid it — and nobody managed what happened in between.
That gap is where forward contracts do their work.
The problem in one example
A UK distributor agrees to buy €500,000 of stock from an Italian supplier. Payment terms are 90 days.
The moment that contract is signed, the business has quoted its own customers, built its margin, and priced its stock — all based on the exchange rate it saw on the day of the deal.
But it doesn’t buy the euros for another three months.
If sterling weakens by 4% over that period, the stock costs roughly £17,000 more than the figure the business planned around. On a product line running a 12% gross margin, a large slice of the profit on that shipment has gone — not because of anything the sales team, the buyer or the supplier did, but because of a currency market the business never intended to participate in.
That’s the point most finance teams miss. You are exposed to the FX market whether you meant to be or not. The only decision available is whether you manage the exposure or accept whatever happens.
What a forward contract actually is
A forward contract is an agreement to buy or sell a fixed amount of currency, at a rate agreed today, for settlement on a date in the future.
That’s it. Three components:
The amount — how much currency you need
The rate — agreed now, not later
The date — when the currency is delivered
You typically place a small deposit (a margin) at the outset, then pay the balance on or before the settlement date. Many providers, Orbis included, offer flexible or “window” forwards that allow you to draw down the currency in stages as invoices fall due, rather than in one lump at maturity.
What a forward contract is not
Three misconceptions come up in almost every first conversation we have:
It’s not a prediction. A forward rate isn’t anyone’s forecast of where the currency is going. It’s derived from today’s spot rate adjusted for the interest rate differential between the two currencies. Nobody at the other end of the trade is guessing.
It’s not a bet. Gambling creates risk that didn’t previously exist. Hedging removes risk that already does. A business with €2m of euro invoices due next year is already carrying a currency position. A forward closes it.
It’s not about beating the market. Businesses that hedge properly aren’t trying to win. They’re trying to know. The value of a forward isn’t the rate you get — it’s the certainty you buy.
When a forward is the right tool
Forwards suit exposures that are known and committed. The clearest cases:
A signed supply contract with fixed pricing in a foreign currency
A confirmed purchase order with payment terms of 30, 60, 90 days or longer
Recurring overseas payroll where the monthly cost is predictable
An agreed acquisition or property purchase with a completion date
Tendering for work where you’ve quoted a fixed price and can’t reprice later
That last one deserves attention. If you’ve submitted a fixed-price tender in a foreign currency and won it, your margin was fixed on the day you quoted. Every day after that, the currency market gets a vote on your profitability.
When a forward isn’t the right tool
Forwards create an obligation. You will buy that currency on that date at that rate. That’s the trade-off for certainty, and it’s the reason forwards don’t suit every situation.
If the underlying transaction might not happen — a bid you haven’t won, a deal that could fall through, a project that may be delayed — a forward can leave you holding currency you no longer need. In those cases a vanilla option is often the better structure: you pay a premium for the right, but not the obligation, to exchange at a set rate. You keep full downside protection and still benefit if the market moves your way.
Similarly, if the rate you want is meaningfully better than the market and your timeline is flexible, a limit order sits in the market waiting for your target level without committing you to anything.
The right instrument depends on how certain the underlying cash flow is. That’s the question to answer first — not “what rate can you get me?”
What does a forward cost?
There are no premiums or upfront fees on a forward. The cost sits in two places:
The forward points. The difference between the spot rate and the forward rate, driven by the interest rate gap between the two currencies. Depending on the pair and direction, this can work for you or against you. Buying euros forward with sterling has, in recent years, often been marginally favourable — a detail plenty of businesses never realise.
The spread. The margin your provider builds into the rate. This is where most FX firms make their money, and it varies enormously.
The second one is worth pressing on. Ask any provider — including us — to show you the spread as a number, not a rate. A provider who won’t quantify their margin is telling you something.
How much of your exposure should you hedge?
There’s no universal answer, but there is a sensible framework:
Rule-based hedging — hedge a fixed percentage of forecast exposure on a set schedule (say, 100% of committed orders and 50% of the forecast pipeline). Predictable, defensible, easy to explain to a board.
Layered hedging — hedge more of the near-term exposure and progressively less of the further-out exposure, adding cover as forecasts firm up.
Opportunistic hedging — hedge partially and leave some exposure open. This requires genuine market monitoring and a clear tolerance for the outcome if it goes against you.
Most SMEs are best served by the first two. The third quietly turns a finance function into a trading desk, usually without anyone deciding that’s what they wanted.
The question to start with
Before you look at a rate, answer these:
What currency payments or receipts are committed over the next 12 months?
What exchange rate is baked into your pricing and budget?
How far could the rate move before your margin becomes uncomfortable?
What proportion of that exposure are you willing to leave unmanaged?
If you can answer those four, you have the beginnings of a currency strategy. If you can’t, you don’t have a rate problem — you have a visibility problem, and no exchange rate will fix it.
William Fuller is Co-Founder and Sales Director at Orbis Exchange Group. Orbis works with businesses across the UK and UAE on international payments, currency risk management and trade finance.