A risk management policy serves as a guiding framework for a company to effectively manage foreign exchange (FX) risk. Here is an example of a risk management policy that can be utilised as a foundation for a business:
Objective: The primary objective of our risk management policy is to mitigate the impact of foreign exchange fluctuations on our financial performance and ensure the stability of our cash flows.
Risk Tolerance: We will establish clear risk tolerance levels based on the company’s overall financial objectives and risk appetite. This will define the acceptable level of exposure to FX risk and guide our risk management decisions.
Risk Identification and Assessment:
- We will regularly identify and assess our FX exposure across different business activities, such as imports, exports, and multinational operations.
- Quantitative and qualitative assessments will be conducted to evaluate the potential impact of exchange rate fluctuations on our cash flows, financial statements, and profitability.
Hedging Strategies:
- We will implement a range of hedging strategies to mitigate transaction risk effectively. This may include the use of forward contracts, options, swaps, or other appropriate financial instruments.
- The selection of hedging instruments will be based on the specific nature and duration of our FX exposures, as well as market conditions.
Decision-Making Process:
- Our risk management decisions will be made by a designated FX risk management committee, consisting of key stakeholders from treasury, finance, and senior management.
- The committee will review and approve all hedging strategies and monitor their effectiveness regularly.
Reporting and Monitoring:
- We will establish robust reporting mechanisms to monitor and report on our FX risk exposure, hedging activities, and their impact on financial performance.
- Regular performance reviews will be conducted to assess the effectiveness of our risk management strategies and make necessary adjustments if required.
Compliance and Governance:
We will adhere to all applicable legal and regulatory requirements related to FX risk management, including reporting obligations and internal control procedures.
Review and Evaluation:
This risk management policy will be subject to periodic reviews to ensure its alignment with changing market conditions, regulatory requirements, and business needs. Any necessary updates or enhancements will be made accordingly.
TreasuryONE offers advice on how to construct your risk management policy as well as the financial products to use to best suit your risk appetite. Our team have the necessary skills, industry experience and service clients in all market segments. Our motto is to optimise your financial flows while minimising risks.