To implement a successful hedge program, it’s important that all parties involved know exactly what the hedge program will provide. This prevents disappointment and level sets expectations with management.
Using a Net Investment hedge strategy to boost income has been around for decades, but the ultra-low interest rate environment in Europe combined with the new rules under ASU 2017-12 has renewed curiosity in this approach.
A common misconception is that if you have a foreign currency transaction, you can simply hedge it and apply special hedge accounting.
Under stable market conditions, most corporate foreign currency hedgers have a “set it and forget it” hedge strategy. Whether it’s cash flow or net investment hedging, once the hedges are in place, the majority of companies hold onto their derivatives through maturity. It’s an understandable practice as the best hedgers usually deliver currency against their hedges. This preserves the hedge rate in margin and converts cash at the same hedge rate.
At Hedge Trackers, we are frequently asked to help identify “hedgeable” cash flow exposures under ASC 815 for our clients.