Writing an FX hedging policy: a template for $10–50M businesses

Why a written policy matters

Most Australian businesses with $10–50M of annual foreign-currency activity hedge in some form. They book forwards before big payments. They convert export receipts to AUD when the rate looks "okay". They occasionally split a hedge across two layers because someone read an article. What they often don't have is a written policy that says, in plain language, why they're doing any of it.

That gap matters more than it sounds. Without a written policy, FX decisions accumulate in the heads of one or two people, and the institutional memory walks out the door when those people change roles. The CFO leaves, the new one arrives, and the hedge book becomes opaque. The auditor asks why a forward was placed in March, and nobody can articulate the reasoning. The board asks what the FX exposure is, and the answer is partial.

A policy fixes this by turning a series of judgment calls into a documented process. It doesn't have to be long. The best policies for businesses in the $10–50M turnover range are usually four or five pages. They state the principles, define the boundaries, and leave room for the treasurer to operate within them.

This article walks through what those four or five pages should contain, with example wording you can adapt. The structure is conservative: it covers everything an external auditor will look for under AASB 9 hedge designation, everything ASIC expects from an AFS licensee interacting with you as a wholesale client, and everything a board will reasonably ask in the wake of an FX surprise.

What the policy is for, in one paragraph

The policy exists to make FX decisions repeatable and reviewable. Repeatable means someone other than the person who's been doing it for the last decade can pick up the document, read it, and act on it. Reviewable means the auditor, the new CFO, or the chair can read the policy, look at what was actually done, and form a view on whether the team operated within their mandate.

The policy is not a forecast. It does not predict what AUD/USD will do next quarter. It does not commit the business to a specific hedge ratio at all times. It defines the framework — the boundaries, instruments, and authorities — within which someone with normal commercial judgment can make decisions that are consistent with the firm's risk appetite.

Who owns the policy

For most $10–50M businesses, the answer is the CFO, with formal approval by the board. The treasurer or finance manager may draft it. The auditor may comment on it during the year-end. But responsibility sits with the CFO, and the board signs off on the principles.

The policy itself should name the roles. Not "the finance team" — specifically:

• The CFO (or General Manager Finance) approves the policy and reviews it annually.
• The treasurer (or finance manager, if no separate role exists) executes within the policy.
• The board reviews the policy on a defined cadence and approves any material changes.
• The dealing line is the named individual or individuals who can actually transact with the FX provider.

Naming roles forces the policy to map onto a real organisation. It also surfaces gaps: many SMEs discover they have no defined treasurer, no defined dealing line, and no separation between the person who initiates a deal and the person who reconciles it.

The seven sections of a workable policy

A policy that actually gets used contains seven sections. Each is short. Together they fit on four to six pages.

1. Statement of purpose and scope

A paragraph or two stating what the policy is for, what currencies and exposures are covered, and what's explicitly out of scope (for example, investment-related FX in non-trading subsidiaries).

Example wording:

This policy governs the management of foreign exchange risk arising from the company's commercial activities, including supplier payments in foreign currencies, export receivables, and committed offshore investments. It does not govern treasury investment decisions, which are addressed in a separate policy.

2. Risk appetite statement

This is the section most policies skip and the one most useful when things go sideways. The risk appetite tells the treasurer how much exposure the business will tolerate.

Example wording:

The company seeks to remove material foreign-currency risk from operating cash flows. "Material" is defined as a change in AUD-equivalent cost or revenue of more than 5% on any single committed exposure, or a cumulative variance of more than 2% of EBITDA in any rolling twelve-month period.

That's a real risk appetite. It's quantified, and it constrains the hedge ratios. A business willing to absorb a 5% move on individual exposures hedges differently from one that wants every cent of margin protected.

3. Hedge ratios by tenor

The actual hedging discipline. A layered framework — discussed at length in our layered hedging article — typically lives here.

Example wording, for a typical importer:

Confirmed exposures with payment dates within the next three months are hedged at 75% of forecast value. Three-to-six-month exposures are hedged at 50%. Six-to-nine-month exposures at 30%. Nine-to-twelve-month exposures at 15%. Exposures beyond twelve months are not hedged unless individually approved by the CFO.

The specific cascade should match the business. An exporter with longer-tenor receivables uses different ratios. A business with very lumpy seasonality uses transaction-by-transaction approvals rather than a calendar.

4. Approved instruments

A list, with constraints. The shorter the list, the easier the policy is to operate.

Example wording:

Permitted instruments are spot transactions, fixed-date forward contracts, window forward contracts up to a 30-day window, and FX swaps for the purpose of rolling existing forward contracts. All other instruments — including options, structured forwards, target accrual products, and any leveraged structures — require explicit board approval.

Excluding structured products in the policy is the cheapest insurance an SME treasury can buy. Most adverse FX outcomes at this scale involve a structured product the business didn't fully understand at inception.

5. Authorities and dealing limits

Who can deal what. Two columns, named individuals.

Example:

The treasurer may execute spot or forward transactions up to AUD 1,000,000 notional per trade, against confirmed exposures, without further approval. Trades between AUD 1,000,000 and AUD 5,000,000 require sign-off by the CFO. Trades above AUD 5,000,000 require board approval.

Authority limits should be enforceable by the FX provider. Most non-bank specialists and major-bank dealing rooms will respect a written authority schedule and route deals accordingly.

6. Reporting cadence

What the treasurer reports, to whom, and how often.

Example:

The treasurer prepares a one-page FX report each month, covering: exposure profile by currency and tenor, hedge ratios against policy targets, mark-to-market of the open forward book, and a summary of trades executed in the period. The report is reviewed by the CFO monthly and tabled at each board meeting.

This is the discipline that turns a hedging program into something visible and reviewable, rather than an opaque series of trades the rest of the business hears about only when something goes wrong.

7. Exception and review process

How to deviate, and when to review.

Example:

Material deviations from policy require written approval by the CFO before execution, with rationale documented. The policy is reviewed annually by the CFO, with material changes approved by the board.

The annual review keeps the policy alive rather than a document everyone signed once and forgot about.

A worked example

A company importing $20M of European machinery a year, paying in EUR over rolling 60–90-day terms, with 30% gross margins.

The risk appetite statement says material variance is 5% per exposure, 2% of EBITDA cumulative. EBITDA is $4M, so the cumulative limit is $80,000.

The hedge ratios apply: confirmed shipments due within 3 months are hedged 75%. Shipments forecast in months 4–6 are hedged 50%. The remaining 6–12 month forecast is hedged 30/15.

Approved instruments are spot, fixed-date forwards, window forwards (up to 30 days), and FX swaps for rolls. Options and structured products are excluded.

The dealing authority gives the CFO sign-off above AUD 1M. Most individual trades fall under that, but the cumulative monthly volume of around AUD 2M ensures the CFO sees and approves the program every month.

Reporting is a one-page monthly summary, reviewed by the CFO monthly and tabled quarterly at the board.

Exception process: if EUR/AUD moves more than 4% in a quarter and the treasurer wants to bring forward layers, that's a material deviation and needs written CFO approval first.

That's the policy. Five pages. Operationally clear. Audit-traceable.

Common policy mistakes

Some are obvious. Others recur often enough to be worth flagging.

Vague risk appetite. "The company seeks to manage FX risk prudently" is not a risk appetite. It's a placeholder. Quantify it.

No named roles. "The finance team" is not a role. Name the position.

Permissive instrument list. "All commonly available FX instruments" is not a list. List them.

No exception path. Without one, the treasurer either follows the policy in conditions where it doesn't fit, or breaks the policy. Either is bad for governance.

No review cadence. A policy that hasn't been touched in five years is not a current policy.

Conflating policy with procedure. The policy is the framework. The procedure is the step-by-step. Don't write a 30-page document combining both — split them. The policy goes to the board. The procedure stays with the treasury team.

Closing

A good FX hedging policy is not a marketing document or a defensive memo. It's an operating manual, written so that someone who's never seen the business can pick it up, understand the framework, and execute within it. Five pages, clear authorities, quantified risk appetite, named instruments, reporting cadence, exception process. That's the entire toolkit.

Most SMEs that hedge well got there because they wrote down what they were doing, refined it through use, and reviewed it annually. The policy is the artefact that makes the discipline transferable. Without it, FX risk management is whatever the current treasurer thinks it is. With it, FX risk management is a process the business owns.

The policy is also the document that makes hedge accounting under AASB 9 defensible. Auditors don't ask whether your hedge worked. They ask whether it was designated according to a policy, whether the policy was approved, whether the designation memo was contemporaneous, and whether the strategy was followed. A written policy answers all of those before the audit conversation starts.