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CA Final · Advanced Financial Management · Foreign Exchange Exposure and Risk Management

Which statement best describes a sound forex risk management policy for a company with significant import payables in USD?

A sound policy identifies exposures, sets hedge ratios, approves instruments, assigns authority and reviews results against risk limits. Treasury is then a risk-management function, not a profit-seeking one. Blanket full hedging or doing nothing ignores the cost and certainty of each exposure.

  1. ADefine exposures, set hedge ratios and approved instruments, and review them against stated risk limitsCorrect
  2. BHedge every exposure fully with forwards irrespective of timing
  3. CLeave exposures unhedged as gains and losses offset over time
  4. DSpeculate on currency views to earn profits for the treasury

Explanation

A policy sets what is exposed, how much to hedge, which instruments are permitted and who authorises and reviews. Blanket full hedging ignores cost and uncertainty of exposure. Leaving it open is not a policy.

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