GTreasury Logo
Back to Blog

Hedging with Helen: Currency Cash Flow Hedging & Quarterly Hedge Periods

Welcome back to Hedging with Helen. Today we’re going to be talking about currency cash flow hedging and the quarterly hedge period.

I’m not a huge fan of quarterly hedge periods. I’m going to tell you what I like and what I don’t like.

What I like is it’s easy and it’s accounting friendly. And that’s probably why so many of you are using them.

But I’m going to tell you: I don’t like it because it’s not delivering economic results for the company in most cases. I’ll give you the exception. The exception is if you’re dollar functional and you’re separately hedging revenue and expense on a quarterly hedge program – great, that’s going to work for you. That’s going to do the job that you need.

But for those of you that have non-functional currency entities and you’re hedging revenue or intercompany revenue as a proxy and, you know, working through all that non-functional currency issue … when you do a quarterly hedge, a lot of times what we’re finding is that you’re using up the hedge in month one and month two. That means in three, generally, at least for a lot of high-tech clients that we have, three is the big month. You know, so here we go into month three, when we’re at the end of the quarter, we need the most coverage.

This is when you know the hedging is going to be most valuable and, “oh, we have very little hedge left over to bring to the table.”

In addition, if we are revenue hedging and had expenses also in that currency, well, we hedged 100% of that revenue in month one and month two, which meant none of that natural effect of the expenses for those periods got to come into play. And that means that in consolidation, when our revenue hedge is applied, that we have protection against all of the revenue number in period one and period two, our expenses are totally, you know, at whatever rate. And then in period three, we’re not hedged.

How to Fix Quarterly Hedges

So, you know, just kind of some quick fix ideas: One thing I like is kind of having a separate hedge quarter that might start with Q three or month three in the quarter, so month three month one, month two.

Another thing that I really like is kind of breaking your hedge up and saying that month one is actually covering, you know, exposures from month one and two, and then month two is covering month two and three, giving you that flexibility to move the amounts within the quarter – if you are over hedged in the first month, move it into the second period. But you’re not pulling all of the benefits from month two and three into the first period.

What Makes Me Crazy…

Now for what makes me crazy. I want to talk a little bit about cash flow hedge programs and the absence of what I think is good performance reporting.

I think there is any number of you out there that believe that if you have passed special hedge accounting that you have a great hedge program. And I want to tell you that I don’t think you have a clue what the hedge program is actually delivering for the company if that’s as far as your performance reporting is going.

If you think about your hedges, the idea is that you are delivering a rate into the financial statements for management. If you’re doing a good job of that, FP&A can use that in putting together forecasts, understanding the impact of currency movements or not having to adjust for foreign currency movements. And management can rely better on forecasts and rely more on hedging.

If you’re not doing performance reporting, then who cares? Who knows what value you’re bringing to the company? Who knows if you’re bringing any value to the company?

So I would really like to suggest that you take a deep breath in your hedge program. You step back, you’ll look at what are the consolidated results, what’s the rate that they came through our consolidated financials at, what was the rate that you were, you know, trying to deliver? And if you’re actually bringing that together, I invite you to take a look at that and maybe do a little soul searching about, do we have the right program in place?

Subscribe to Our Newsletter

Stay in the know: Get the latest on our events, digital trends and how they are impacting your industry, and what it means for the future of business.