4 Step FX Risk Management Policy

A Foreign Exchange (FX) Risk Management Policy is a formal written document that serves as a framework for mitigating and optimizing a company’s FX risk profile. In practice, FX risk management policies can vary widely across organizations depending on their size and structure. Getting started or improving already existing policies can be a challenge without knowing best practices and seeing examples. Therefore, this FX Risk Policy Drafter was designed to help you create a comprehensive Foreign Exchange Risk Management Policy in 4 simple steps.

1. Enter the company name, home country, functional currency, effective date, and review period.
2. Establish internal controls by appointing at least three personnel to the segregated duties of trading, accounting and record keeping.
3. Define materiality thresholds by specifying minimum transaction amounts and hedge coverage levels.
4. Specify the derivative hedging instruments authorized for use and minimum acceptable counterparty credit ratings.

Upon completing these 4 steps, 9 sections of the Foreign Exchange Risk Management Policy are drafted and include (1) Function, (2) Definitions, (3) Policy Guidelines, (4) Roles and Responsibilities, (5) Reporting (6) Internal Controls (7) Counterparty Guidelines (8) Policy Review and (9) Policy Approval. Upon reviewing these 9 sections, you will clearly see how the inputs in Steps 1 through 4 are used, and how the program as a whole serves to mitigate currency risk exposures inherent in a company’s business model by specifying how the company’s currency risk management goals will be carried out.

You can use this tool to improve or enhance your already existing policy or to lay out a new formal Foreign Exchange Risk Management Policy with clear parameters and guidelines for managing currency risk across the enterprise. Not only does this tool offer a well written policy you can use to tailor your own policy after, it also provides the level of detail to make implementation feasible. Take advantage of this Foreign Exchange Risk Policy Drafter as your own writing tool to help create an optimal foreign exchange risk management policy for your organization.

To learn more about about corporate currency risk management best practices, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.