The importance of FX policy

Speaking at a seminar on non-trading FX risk management, he said a policy can minimise a company's economic exposure outside of the trading businesses. Similarly, it can reduce accounting profit and loss volatility, where practicable at both legal entity and group consolidated levels, he added.

The scope of a policy should cover structural foreign currency exposures (SFCE), foreign currency profit stream and transactional/commercial FX exposures, said Tyler. It should not, however, cover the FX trading businesses.

Tyler said an open SFCE position may be helpful in hedging capital ratios against FX movements, but he sees little need to hedge future foreign currency earnings. "Investors probably want exposures to other countries and thus implicitly accept such risk," he said.

When it comes to managing transactional/commercial FX exposures, Tyler said a simple approach is to match all FX exposures, including interest accruals. "One corollary is that if a USD provision is raised for a USD loan, then USD should be bought to hedge the provision," he said. Exceptions should be signed off by the group treasurer, he added.