Consider a very ordinary transaction. A British engineering firm signs a supply contract with a French buyer, priced in euros, and the quote is built on a 12% operating margin. Between signature and settlement the euro slides 7% against sterling. The margin is gone. Nobody in the business made a decision about currency that day. The decision was made when the contract was signed, in someone else's meeting, by people with no mandate to spend anything on hedging.
This is how most currency losses happen: not through markets being wild, but through the moment of exposure arriving before the moment of management. Treasury sees the position when it is booked. The board sees it when the loss lands. By then, the only conversation left is about blame.
By the time a currency loss reaches the board pack, the decision that caused it was made months earlier, in a sales meeting, on a different floor.
Where exposure actually starts
It helps to separate three exposures, because boards usually only see one of them. Contracted exposure is the straightforward one: receivables and payables in a foreign currency with fixed dates. Anticipated exposure is the bigger risk: bids, forecasts and pipeline that will convert one day but has no date yet. Translation exposure is the quiet one, the consolidation effect that moves reported numbers without touching cash.
The cheapest hedge almost never involves an instrument. It involves the group structure. If your Dutch entity sells in euros to Germans and buys in euros from Poles, the euro exposure nets itself if you let it. We start every FX review by mapping where cash naturally pools, because the answer frequently reduces the hedging bill before a single forward is priced.
What a decent policy looks like
A board-level FX policy fits on two pages and answers four questions: which exposures the company manages, what proportion and over what horizon, which instruments are permitted, and who can sign for what. That last point matters more than the first three. In most of the losses we are asked to pick apart after the fact, someone with good intentions hedged the wrong leg, or doubled a position, or used an instrument nobody had authorised.
The instruments themselves are not exotic. Forwards for the contracted book, always. Collars where the company wants protection but resents paying premium. Plain vanilla options, bought not sold, where the exposure is anticipated and lumpy. What does vary is pricing: spreads quoted to mid-market companies can differ by a factor of three between providers, and the difference compounds every month. We place hedging only with FCA-regulated institutions, and part of our job is making the quotes compete.
Settlement discipline deserves a mention, because it is free. Companies that let every invoice convert at spot on the day it falls due are simply donating the spread to their bank, repeatedly, at moments chosen by the market. A handful of multi-currency accounts, a weekly conversion routine and slightly less haste will save real money with no instruments at all.
Three questions for the next board meeting
First: what is our unhedged exposure, by currency pair and horizon, and who checked it? Second: who is authorised to transact hedges, individually or jointly, and within what limit? Third: where did the last unmanaged currency loss land, and in which line of which subsidiary did we notice?
If the answers take more than a week to assemble, the policy is not working. A competent review takes about a fortnight, most of it spent on the group structure, and it tends to pay for itself in the first year simply through tighter spreads and fewer surprises. Currency risk will never be interesting. It does not need to be. It needs to be managed before the sales meeting, not after the loss.