Most mid-market companies in the UK are exposed to foreign exchange risk — yet fewer than half have a formal hedging policy in place. The result is ad hoc decision-making, inconsistent execution, and boards that lack visibility into one of the largest financial risks on the balance sheet.
Why governance matters more than the hedge itself
A hedge without governance is a guess with documentation. The most common failure in corporate FX management is not choosing the wrong instrument — it is the absence of a clear framework for why the hedge was placed, who approved it, and how it will be monitored over time.
Governance provides the decision-making architecture. It ensures that hedging activity is aligned with the company's risk appetite, that the board has clear oversight, and that no individual can commit the business to a financial instrument without appropriate checks.
Building the framework
1. Hedging policy
The policy sets out the objectives of hedging (protecting budget rates, reducing P&L volatility, preserving cash flow), the instruments permitted (forwards, options, swaps), and the currencies and tenors in scope. It should also state what is explicitly not permitted — speculative positioning, for example.
2. Approval matrix
Who can authorise a hedge? At what size does it escalate? A clear approval matrix prevents single points of failure and ensures the CFO and board are engaged on material exposures.
3. Exposure identification and forecasting
You cannot hedge what you cannot see. A disciplined process for capturing exposures — from confirmed orders, forecast revenues, and intercompany flows — is the foundation of any programme.
4. Execution controls
Controls around counterparty selection, pre-trade checks, and dealing mandates reduce operational risk. They also ensure the company is getting competitive pricing rather than simply accepting the first quote.
5. Monitoring and reporting
Post-trade, the framework should include mark-to-market reporting, hedge effectiveness testing (where required by accounting standards), and regular reviews of whether the programme is achieving its stated objectives.
The most frequent issues we see in mid-market companies include policies that exist on paper but are not followed in practice, over-reliance on a single bank relationship without competitive benchmarking, and a disconnect between the treasury team and the board on risk appetite.
Where to start
If your company does not have a formal hedging policy, the first step is an honest assessment of your current exposures and how they are being managed today. From there, you can build a governance framework proportionate to your size and complexity — it does not need to replicate what a FTSE 100 does, but it does need to be documented, approved, and followed.