Foreign Exchange Risk Management Procedures

[Jasz]

Foreign exchange risk management procedures should be in place to ensure that the risks of an exposure to foreign exchange risk are managed and controlled. The objective of these procedures is to ensure that appropriate risk mitigation strategies are put in place, so as to minimize the impact of such exposures on the business.

The process of managing foreign exchange exposures is a continuous one, with no single point of failure by which all risks can be eliminated.

Identify the types of exposure (i.e., currency risk) and its associated characteristics (i.e., maturity, credit quality, etc.) at the beginning of each year.

Determine whether or not there are any significant changes in circumstances over time (i.e., market movements).

Review the existing hedging policies and techniques that have been implemented to address those exposures identified earlier, including whether they are still valid at this stage or if they need to be reviewed and amended if necessary.

If there are significant changes in circumstances over time, then it may be necessary to revisit these policies and techniques again as part of a more comprehensive review process before implementing any new hedging strategies.

 

[Holicent]

The main objective of the foreign exchange risk management procedures is to minimize the risk of loss to the company in respect of its foreign currency exposure. The procedures should be reviewed at least annually by a person independent from the treasury function who has knowledge of the business operations and financial information.

The review should consider:

a) identification and classification of all foreign currency exposures;

b) estimation techniques for foreign currency exposures;

c) an assessment of the different methods available for hedging exposures against market risks; and

d) strategies for managing existing exposures.

The foreign exchange risk management procedures must be approved by the board of directors. In addition, these procedures must be periodically reviewed and updated to ensure that they are always in line with current market developments.

In order to manage its currency risk, a company must have a foreign exchange strategy that clearly defines how it intends to reduce its exposure to exchange rate risk. The strategy should also specify the currency exposures that are hedged and those that are not hedged. It is important for companies to review their hedging policies regularly to determine whether they need to revise them or add new hedges.